CAVA Group, Inc. (CAVA) Earnings Call Transcript & Summary

All right. I am Brian Mullan, restaurant analyst at Piper Sandler. Thank you, everyone, for being here. We're very happy to have the team from CAVA. We've got Brett Schulman, CEO; and Tricia Tolivar, CFO. Thank you for being with us. Just to kick it off. Congratulations, Brett and Tricia, obviously, the IPO was very well received.

One question that we get quite often is just on the development front. There's a unit growth acceleration that's expected to take place. And so maybe you could just talk about how you prepared for that, how you got the organization ready? I know there was this Zoe's conversions going on and just your degree of confidence in that team, and what you've done?

Yes. Well, thanks, Brian, for having us. Back even before we bought Zoe's, we were ramping up our new restaurant development. We opened 29 new units in 2018 and then closed on the Zoe's acquisition at the end of that year and started to embark on our conversion process while still building out new units, but had downshifted the de novo unit count. When you think about how we build up the team, you think back to our Series F in 2021, that really allowed us to build out the capabilities to ramp up not only the conversion program, but ramp up our restaurant development in general. And the conversion program gave us a unique aspect on the real estate side, where we had this embedded growth through predominantly conversions, which allowed our real estate team to really focus forward 24 months. I mean building out the pipeline for '23, '24, '25, which we're now reaping the benefits of this year. So that's on the real estate side. On the design, construction side, we built the capabilities. Conversions were very much like new builds. So they were going through the same process from a construction and design standpoint. So we have a very robust team that was built back in '21. And then from an operations standpoint, we started to develop what we call our Academy GM network, because we know to have successful openings, we have to have great leaders in place. And so we built out our Academy GM network, which we now have over 40 Academy GMs today. These serve as training hub in the markets that they operate. And basically, we have a training hub in every garden in the country, which is what we qualify an area leaders span of control of 8 restaurants. So we opened over 20 new markets in 2021 and 2022. We're down shifting this year actually. We're only opening a couple of new markets, but we're building out the 24 states we now operate in. So feel really good about the team, the capabilities and the infrastructure we have in place, and the pipeline that they've built and the capabilities they build going forward.

Okay. And on the earnings call, last month, the first one, again, congratulations. I think you talked about you've re-skinned the CAVA app. It follows a unified e-commerce site. It was launched at the end of last year. You also talked about something which I'm not sure is related or not, so I want to ask you, microservices initiative, building an in-house digital platform that not a lot of restaurant concepts have. So just for those in the audience or on the webcast who weren't familiar, a little history behind why you did this, why now, what you've done, and how this helps you moving forward?

Yes. We're a restaurant brand, but we've always been digital forward. We built our own app back in 2017, and it was a monolithic architecture. So a single large application. And what we did was we embarked on a journey over the last 2 years, and it's another example of the robust infrastructure we've invested in that we're now leveraging, where we take that application and we break it into a bunch of smaller independent services within one contextual bound. So these are highly scalable, highly flexible services when you think about order, menu, payment, delivery that allow us to now horizontally scale the application versus vertically scale it and allow our engineering and our product teams to innovate at a very high pace, a feature deployment that would have taken us a few weeks in the past, it can now take us a few hours. And it allows our team to continuously improve. When you think about something as mundane as we monitor all the CX requests and hey, I want to get my receipt, I want to be able to see the last 4 digits of my credit card to know which credit card I use, and they were able to deploy that in a matter of hours. And then we back it with a master data software platform so that we have a single source of truth to deploy any menu updates, whether it's menu item or price, very rapidly and very specifically. So this really sets the stage for us to now bring behind new feature enhancements for the guests, new experience enhancements as well as personalization and gamification down the road. And when you think about loyalty, for example, the team has already deployed. We're going to test pilot a new loyalty program at the end of this year with the goal of launching at the end of '24. We're going to test and learn over the next 12 months. But they've already deployed the new UX in the background of the app, and we can simply turn it on for the test pilot at the end of the year when we launched the test pilot. So very flexible, very scalable platform that really sets the stage for our digital growth.

On loyalty with those tests, what will you be watching most closely? And I think you've had the same program for quite some time. So what has you most excited about loyalty? I guess question 1 is the test. But then really, as you look out 3, 5, 7 years from now, what can loyalty do for CAVA?

Yes. We've had the same spend X get Y program since 2013. We were one of the first white label level up, if you remember that company, that was bought by Grubhub programs. And we really wanted to enable our guests to have a mobile payment to be able to understand their behavior. And we've had that program, obviously, for almost a decade now because we've had some other priorities in the interim when we bought Zoe's. Now that we're finally on the other side, it allows us to have the bandwidth to get after what we think we've barely scratched the surface of. 25% of our revenue comes through our loyalty program. We have almost 4 million users, and we don't think we've added a ton of value for those guests or the business at this point. And what we -- our intuition was and what's confirmed by the data is that even though it's a 9% spend, our actual cost is a lot less because the redemption is a lot less because you have to earn within a 6-month time period or you go back to 0. And so what we see is our highest most frequent guests are the ones earning the reward, and these are guests that likely would have come otherwise anyway without it. And they're not feeling the value of the reward. And our lower and medium frequency guests don't have a good enough incentive to drive greater frequency. And so we want to use a program where we use the dollars and spend them more thoughtfully to incentivize the behavior for our guests to make it more meaningful for them as well as more valuable for the business. And then you think about loyalty in terms of building a deeper emotional connection with our guests, and really building upon our brand equities. And you can imagine all the things we can do with customization, with gamification to really build deeper brand connections as well as even potentially in the future, connecting it to our CPG channel and having that cross loyalty channel.

Okay. And then pivoting a little bit, but I think there's about 10 digital kitchens, I think, reported in your store count. Just for the benefit of those in the audience or on the webcast, remind everyone what those are, give a little history of how they came to be?

Yes. So this we think is another great opportunity down the road. This is a multiyear journey where we've always had catering requested at CAVA. But given our in-restaurant AUVs and the capacity constraints of some of those restaurants, we were very mindful of not going after catering at the detriment of our other existing channels. We have second dedicated digital make lines in every restaurant, and then we have our in-restaurant serving line. But -- even when we acquired Zoe's, we saw the potential pitfalls of focusing on catering, where 17% of Zoe's revenue came through catering, but it was often at the detriment of the in-restaurant or digital order experience. So we said, how do we take advantage of this opportunity without diminishing the other channels? And so we've tested different format derivations. Our CAVA digital kitchen is basically a centralized catering hub with also digital off-premises delivery pickup without in-restaurant ordering. And then we have our hybrid kitchens, which are regular CAVA restaurants with that second make line, but expanded back of house for catering centralized production. And we're testing the third phase, which is just a regular CAVA restaurant that can support catering. So then we look at markets and we say, how we think about our real estate in terms of kitchen production and how do we orient this kitchen production to meet the demands of that trade area given the off-premises demand and the in-restaurant demand. And that's not the same in every market, right? We have some digital order, urban restaurants over 50%. We have some at 10%, right, that have 80 seats in the dining room and every seat is full at lunch. So how do we use these format derivations to flex our production to meet the channel demands of the guests in a very specific way.

And that's all very helpful. And I hope -- I know catering is an opportunity. I know it's kind of related to the digital kitchens, but it's separate. Hopefully, this question makes sense. As you play this forward, would your preference be to get the standard CAVA restaurants such that it could serve catering and not even have to pursue the digital kitchen strategy? Or do you want to do both? Is it going to be both? I know you're still testing, but...

We want to do both. It's how we view the world, this convergence of physical and digital. And again, we don't think it's a monolithic one-size-fits-all approach, kind of cookie cutter across the country. We think it's more nuanced where we use these different formats, again, because the catering demand in one trade area can be very different than another. And so which format is most relevant to that trade area, we want to have those arrows in our quiver to pull out and address them in a very specific way.

Tricia, last quarter, the comp results were just very, very strong. You mentioned perhaps there was some sort of halo around the IPO potentially in the press associated with that. Are you able to parse out how much of a lift you saw from that? Or are you still seeing that? Is that halo something that sustains for a while? Or maybe that's not how we should think about that?

Thanks, Brian. So certainly, our same-restaurant sales in the second quarter at 18% were strong and 10% of that was positive traffic growth. And so as we looked at our black box data and our performance of positive traffic trends compared to others that we're seeing some deceleration, we certainly believe that the awareness around the IPO and the billion impressions we're hearing from our external PR firm around that event had some impact. It's difficult to specifically quantify and know, but certainly, a lot of momentum. And we just continue to watch the data and make sure that we're delivering a high value for our guests, particularly the challenging economic times and that permeates through how we operate our business.

Okay. And then Tricia, also the restaurant level margin in the quarter, obviously, sales helped up, but they were just very, very strong. We have a guide for this year to be at least 23%. And when we look at the way consensus is set up for the next few years, it does have restaurant level margins going down. So just again, for those who are learning the CAVA story, are there anything unique items that would cause it to be that way? And anything you could expand upon?

Sure. So a couple of things impacting the overall restaurant level margins. I think, first, our first and second quarter margins themselves really demonstrate the power of the CAVA model and what we can deliver. But we really have to be mindful about where we are in our growth and development. And so we want to make continued investments in our people and our processes and our culinary to support that's just growth that we're going to deliver as we move forward. So I don't want to overheat the engine, I want to make sure we're delivering there. If you look back not too long ago, 20% was not an unreasonable restaurant level margin. So what, again, the power of the first and second quarter is the power of the model, but wanting to make sure we invest back in. The other thing is very significant same-restaurant sales growth, certainly provides a lot of leverage. So you think about it on almost every single line efficiencies in waste, efficiencies in labor. And when sales are taking off, you're often spending a little bit of time catching up from an hours perspective and making sure that you've got the right level of service in the restaurant to be able to deliver on that guest experience that's so important to us. And so then when you go down into other operating expenses and occupancy, significant leverage in those lines, too. So strong model itself, but want to make sure we're investing and certainly looking at wages. We mentioned at the end of the second quarter. We were about 3% higher in average wage versus the same time last year, and that's reflective of our continuous reinvestment, making sure we've got the right pipeline of leaders for us to move forward, and we're delivering in a very positive way, both financially, but also from the guest experience as well.

That's all very helpful color. And then Brett, to turn it back to you just wanted to ask about CAVA foods. It's not something that comes up as much given the very exciting unit growth story for restaurants. But really wanted to use this forum, just to ask you, about maybe a little bit of [ history ], and what's the vision for this business? And how do you see it evolving?

Yes. It's actually predated our fast casual business. It's how I came to meet my co-founders. It's always been a bit of a supporting actor, but back to infrastructure, I talk about restaurants are not like -- don't scale like SaaS software. And they take a lot of infrastructure, a lot of heavy lifting. And one area we've invested against that is on our manufacturing capabilities. So we have a 30,000 square foot existing facility in Laurel, Maryland, and we're under construction in a second 55,000 square foot facility in Verona, Virginia that will come online in Q1. And this supports the dips and spreads production, can support up to at least 750 restaurants at scale, but it also gives us added production capacity to think about expanding our CPG channel. The Laurel facility has really been monopolized by the restaurant growth. So this gives us the option down the road. We obviously have a lot we're trying to accomplish in the near term. So we're not looking to aggressively grow that channel to date. It's a very small piece of the business. But it's a really interesting brand equity, and we do see a halo effect in the market. We're going to Chicago next year. We've talked about that. We've been in Chicago Whole Foods Markets for over 8 years now. And we've seen that awareness show up in our brand health surveys, where it helps see the market. It helps also really seed us as a culinary brand, have that precious real estate in your refrigerator in your house where we're being served as a brand to your friends and family and not just the place to grab lunch or dinner. So we think there's really interesting opportunities down the road. I talked about tying it to loyalty. That will address when the time comes that makes sense. But -- we are in Whole Foods Markets nationally and continue to get more inbound requests. And we just think it's a great way to establish our equities as a culinary brand.

And just a follow-up there. Understanding, very clear it's small today in that. But how do you want investors -- the restaurant dedicated investors or those that aren't as familiar with CPG, just the margins in that business over time over the long term and how those scale and how much -- how that works?

So over the long term, the margins on the CPG business could be very similar to our margin on the restaurant side. But however, keep in mind, we're opening this new facility. And so there are going to be investments we're making in a short term around the opening of that facility, building that up and what it can deliver in the short versus long term.

Okay. And then back to the business in the stores, Brett, maybe you could just talk about, again, for those who aren't as familiar the history of menu innovation at CAVA, how important is it? How have you gone about it? And how much does the team think about it?

Yes, it's incredibly important. Our food is our product. We are defining a new category in Mediterranean. We think it's the next large-scale cultural cooking category. My partner and co-founder, Ted Xenohristos, who's our Chief Concept Officer, he leads our culinary team of chefs, including one of our other co-founders, Chef Dimitri Moshovitis. And we think about it really in 2 tracks, seasonal innovation and core innovation. We want to make sure we don't add complexity of the restaurant and work within the 38 ingredients on our line, but we want to bring excitement and newness. So we do that through seasonal innovation, 3 to 4 pulses a year. You think about our Lemon Chicken Bowl this summer. In October, we'll be bringing back our Balsamic Date Vinaigrette that we brought to market last year that was incredibly popular in our Sweet and Spicy Chicken Pita. You'll see other new dressings and items like that seasonally about 3 to 4 times a year. And then 1 or 2 tentpole moments of core innovation. So we talked on the earnings call about a steak, that's in a market. It's in an operations test right now, going through the stage gate process. It will go into a market test in to 2 markets in December with the idea of launching it at some point year. And that would be an example of core innovation that would stay on the menu. One small core innovation we did in the summer was Fiery Broccoli as a topping. So we like to really look continuously at our categories, and Lentil Tabbouleh was a slower moving. It was a little redundant to the lentils in the base category, and we deployed Fiery Broccoli, which has been a very well-received topping that's added better diversity to our topping set. So we've got a team that's building a pipeline of core innovation and a pipeline of seasonal innovation that we'll look to pulse out in the years to come.

And you referenced steak. I did want to ask about that. Have you ever had that historically? And are there any specific insights behind this one test in particular?

Yes. So we had grilled meatballs, so beef meatballs meals, so beef product on our line for a number of years from our very early days up until January. And then we removed it. It was a slow mover. It was a less profitable item. And from a production standpoint, it was a [indiscernible] product with a value-add partner. It was an inefficient product. And we saw it as an opportunity to upgrade and bring a more value-added product to our guests as well as to the business. And so we removed it from the line in January, and steak is and of the potential items that would replace it and address -- our Mediterranean pantry and the way we position as a brand is, I'd like to say, you don't need a snack right now after you eat at CAVA. And we give you a portfolio of ingredients that can meet any of your needs, whether you're looking to eat vegan, vegetarian, flexitarian is a big consumer for us. So you get 2 scoops when you order chicken. We see a lot of guests opting into a scoop of chicken and 2 falafel balls or a scoop of vegetables, right, as we help incorporate more plant-based eating into people's diets, or if you just went braised lamb and [ crazy feta ], you can come and be happy at CAVA as well. So that's what's reflected in the broad diversity of our customer base, the broad diversity of our proven portability. And we think a beef item and steak item married with all of our other items, including the plant-based items, gives people a good balance to opt into and create greater frequency in new occasions.

Okay. And then Tricia, I wanted to bring up, it's, I guess, digital, I don't know what the right term is, but digital order ahead and drive-through pickup out a window format, we need a catchy name for that. But it's -- I think there's about 20 today. I think they're doing higher volumes than the base and higher margins given the digital nature of it. I know that you want to increase the development out of time. But how do you want investors thinking about the pace there? And what are kind of some of the guardrails? I know it's not going to be all of the development, but it sounds promising. So we'd love to hear how you're thinking about it.

So we'd like to go on digital pickup lanes. So...

Apologies.

No, no. And they are more efficient, you're not ordering at a kiosk, you order on your phone and then come pick it up when it's available. And there are 24 that we have today and a couple more opening here in the very near future. And they do tend to add about 10% to 15% when we compare to other restaurants in their markets from an AUV perspective. And there's not a lot of incremental costs associated with it. But however, what we're finding is it's an increasingly larger part of our pipeline. So we'll have more opening in '23 and even more opening in '24, but we're not establishing a target of we'll do x percent that are going pickup lanes because we want to make sure we're being flexible in serving our guests in the best way possible, but also being mindful of the return. So recently, with higher cost, interest costs, a lot of developers that we're considering doing new lanes that we were interested in, have started to retrade. And so instead of getting caught up and chasing a higher economic costs associated with it, we've decided to pause on some of them and evaluate other options. So it certainly is an increasing portion of our portfolio. And the great news is 65% of our guests want to dine in our restaurants and enjoy that experience. We bring heart health and humanity to food, and we think we display that in a very positive way as they come and join us in our restaurant.

And on balance, on average, versus when you're looking -- the development team is looking for sites for the standard format, is the competition for those sites today higher? Are you seeing that?

Certainly, a Raising Cane's or Chick-fil-A can underwrite a site like that a little bit easier than we can. I would say that our presence in the market now in 24 states across the country, the awareness around Cava is increasing. And so there are more developers and landlords looking for CAVA to be part of their environment because of the excitement around the brand.

At this point, I want to see if anyone in the audience had a question for Brett or Tricia? Okay. Let's -- maybe we can talk about the delivery business in the restaurants for those. Just what's the history? Were you doing delivery pre-COVID or did it come on later? And do you like that business? And what do you like about it? Or what do you not like about it?

Yes, we were just testing it very thoughtfully. We weren't leaning into it pre-COVID. Certainly, when COVID came on the scene, we realized the need for our guests to be able to meet their needs with a contactless channel, and it goes back to our infrastructure, our engineering team, we're able to spin up to national partnerships with UberEats and DoorDash integrated into our POS system as well as a white label in native delivery within our app. We think it's a need state that's developed over the past 5 to 8 years that is relevant to consumers. And again, we want to meet them on their terms. So we want to make that the best experience possible to them. We think that there's some limits to the elasticity of that channel. But if the channel, nonetheless, you can imagine a family where the parents are going out to dinner and -- or going out for the night and they haven't made food for the kids, and it's kind of a cost of them going out, or someone that's busy at work, that finds their time to be more valuable at the cost of their doing business. And so it's a premium convenience occasion that has grown and formed, and we want to make sure that we can meet our guests on their terms in that channel.

And from a cost perspective, we're agnostic because of the premium associated with it, whether the guest visits us in the restaurant or has it delivered from a dollars perspective, it's pretty even.

Thank you. And maybe we could use the rest of the time. I think you're going to enter Chicago and the Midwest, 2-parter, as you've done well in every state you've gone in, the business is growing. Do you still feel the same, for lack of a better term, nerves that you might have 6, 7, 8 years ago? And I know in this market, you have insight that there's some brand recognition. So maybe if you want to pick another new state because there are so many -- it's a 2-parter, talk about the entrance in Chicago. And then more broadly, your confidence.

Yes. It's really more if there's nerves around execution. We know that when we go into a market and we put our best foot forward, we make our food with consistency. We deliver with CAVA hospitality, guests try us. They like us. They tell their friends and more people come and the comps grow. When we don't do that, a restaurant will struggle. And we got to get it turned around. And then when we do, do that, we see the numbers go up. So we, again, with 24 states, the diversity of trade areas, whether urban, suburban, exurban, small town, Mobile, Alabama, Bryant Park in Manhattan Castle Rock in Colorado, you name it, we've seen this work. When we deliver on our commitments and we deliver our food to our ability and our hospitality in the Mediterranean way, we see it work. So we're just excited to bring it to new communities across the country, including Chicago, where as I mentioned in our brand health surveys, we have a lot of awareness existing in the market. We have a lot of people that have been clamoring for us to get to that market. So excited to finally get there.

Thank you. I think that's a great place, and I'm sure everyone is excited. So thank you very much for being here.

Yes. Thanks for having us.

Thank you.