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

Welcome back, everyone. John Ivankoe, JPMorgan. Happy to have CAVA, Brett Schulman; Tricia Tolivar, joining from the company. Recent IPO, June of 2023. From JPMorgan, congratulations on your success. And as we've kind of thought about the last 6 months, you've hit all your development targets. You've hit your new unit volumes, you exceeded your new unit volume targets. You've exceeded your margin targets. A lot has gone right.

From a CEO and you look at kind of where you stand in the world, how does this company mitigate risk while ensuring future returns? What is it that you're the most focused on not just what you're going to do right, but what you don't do wrong.

Yes. Thanks, John. Thanks for having us. It's great to be here. We think about everything. Often people ask me what keeps me up at night, I say everything. One thing we're really laser-focused on is developing those great future leaders, our GMs to run those new restaurants we're trying to build and open and make sure we've got the right talent to deliver on our brand proposition. Our great Mediterranean unique cuisine we're tasting now and united with that Mediterranean hospitality. And then making sure we've got the infrastructure to support our scale, which we've invested in heavily over the years. It's everything from our new production facility that just went operational last month in Southwest Virginia. That's a second sister facility that's 55,000 square foot state-of-the-art facility where we produce our chef-crafted dips and spreads and some of our dressing bases, takes that complexity out of the 4 walls of our restaurant and supports growth up to at least 750 restaurants. Or our digital ecosystem where last year, we replatformed and launched actually in January '22, a new micro services architecture, which is a highly scalable architecture for our digital ecosystem. And then going back to those future leaders, the GMs, we developed our Academy GM network. So this is kind of, in a sense, our farm system, where we have over 55 Academy GMs, including multi-unit leaders today. Those are our top-tier general managers that go through a certification program and they get certified as an Academy GM and become a training restaurant where we train those future leaders to open those new restaurants. So it's really thinking about scalable infrastructure and making sure we have the right leaders for those future restaurants.

And what's interesting, your revenue in fiscal '24 by our estimates will still be under $1 billion. So technically, you don't have scale. So I guess -- I mean considering your capabilities that you have, which are extraordinary, what is it that your current size isn't allowing you to do that you will be able to do in the future as your revenue base substantially grows?

Well, I think we've always tried to punch above our weight as referenced by some of the things I just talked about. And I think it just continues to allow us to mature and deepen our capabilities. So one of the things that we're embarking on now is really taking our existing data infrastructure and broadening and deepening those capabilities, everything from our loyalty program that we're going to relaunch at the end of this year. We were in a test pilot. It's a loyalty program we've had for a decade now. So I'm excited to leverage the infrastructure we build as well as our emerging data capabilities and things like we talked about at the earnings call where we're embarking on a multiyear journey of an initiative called Connected Kitchen, which is leveraging everything from camera vision and generative AI on top of our data infrastructure to make our operators more efficient, our guests more engaged and our business analytics more insightful, that's going to add value over the long haul.

So let's view loyalty as a part of marketing. So loyalty, let's talk about where we were. The journey that we've been on and the changes that you expect to make and what you expect to accomplish with this and what the current time line would be?

Yes. As I mentioned, we've had the same program for 10 years now, and we would have liked to have relaunched it a few years ago, but our job is to make sure we prioritize and not do too many things at once. And excited that we're finally able to get after this. So our traditional program was a spend x, get y construct, spend $88, get $8. In November, we converted that to an earn and bank points model, so a bankable points model. And then in Houston market, specifically, we launched a test pilot, which we're going to expand to the Carolinas here shortly, where we created multiple different types of rewards to redeem. And so what our goal is, is a couple of things. One is what we saw historically is that our lower and medium tier frequency users really didn't feel engaged with the program. They didn't feel like it was so attainable. So we're looking to give them easier hurdles, make them more engaged and drive frequency in those lower and medium tier users. And then our power users, our upper tier users, they weren't really feeling the impact, right? The $8 will get credited. They wouldn't really feel it. They wouldn't have any kind of value add for it. And so now we want to empower them and put in their hands the ability to redeem their rewards of their choice on the occasion they want to redeem them on. And so our plan is to relaunch this at the end of the year, and then that becomes the base phase of a multi-phase journey where we'll layer on unique challenges and incentives that are really becoming personalized to you and your behavior as a guest of CAVA, how you like to engage with us, what items you like to purchase to create greater value in each experience you engage with us.

And things, for example, double points, I don't know if you'll call them stars, but double points, maybe in certain days of the week or certain times of the day, and there will be more that -- more specific behaviors, I assume that you'll be able to drive with this program.

Yes, absolutely. And you can even think about interesting things that are unique to us like our CPG channel where you could potentially get redeemed -- you could redeem a reward where you get a free 8-ounce container of that Crazy Feta at Whole Foods, and then we can provide you some recipes to enhance the food in your kitchen, not just the food you get from our kitchens.

To pivot to Connected Kitchen -- so as part of Connected Kitchen, the new labor scheduling model, is that plays a part of the same program? Or is labor scheduling separately?

That's different. Connected Kitchen is a much more forward-looking initiative based on our data infrastructure and camera visualization and generative AI, whereas the labor deployment model, which we put in test in 20 to 30 restaurants is really about -- our business grew same-restaurant sales 17.9% last year. So significant dynamic growth. Also, when you think about the channel mix shift coming out of the pandemic, and we really looked deeply and reviewed how we are deploying our labor hours, and we felt there was an opportunity to much better align and reallocate those same amount of labor hours, but in a much more efficient, effective way to set our team members up for better success ultimately delivering better guest experience, better speed of service, better quality of service that matches our revenue curve and taking some of the tasks that currently doing during peak hours, redistributing them during pre and post peak hours so that they're focused on that guest experience during those peak hours.

And perhaps telling them what to prep and when to prep and visually as part of the Connected Kitchen, eventually, the Connected Kitchen will drive that labor allocation model, I would imagine.

Yes. So you can imagine longer term, our grill cook, the screen telling them how much chicken to drop every 30 minutes based on how much is in those bowls on the line, how much demand is coming through real-time channels. You can even imagine at our POS, where the POS is recognizing the premium attachment in the bowl that's about to be run. We don't have to call it down the line. The cashier doesn't have to understand what it is in back of house, how much of a topping to be prepping every shift, every hour, again, based on real-time demand, historical data to free up our team to deliver on our mission, which is bring heart, health and humanity to food and deliver that hospitality and engagement with our guests.

So let's talk about the consumer, CAVA's current place within the overall consumer consideration set where the pricing is. McDonald's has made some fairly negative comments about its lower end consumer actually trading to grocery, food at home. Starbucks has seen some weakness in their occasional afternoon business, their discretionary business. Those are 2 big businesses that touch a lot of customers. Both have given some fairly negative reads, one would say, on the current environment, current first quarter, even for the full year in the case of McDonald's. So how do you feel about your consumer, maybe talk about the demographics, how they feel about your pricing, what they're choosing between and their willingness and receptivity of even increasing their frequency.

Yes. So what we've experienced in 2023 with regards to the consumers is our consumer has been really resilient. So what we found in '23 is with a very strong positive traffic trend and incredible same-restaurant sales growth, that consumer was continuing to increase in their premium attachments. So what I mean by that is higher incidents of our harissa honey chicken, for example, also a higher instance of our pita chips. If you haven't had them, I'd highly recommend giving them a try. They're quite addictive. But it's something that we're finding that we were anticipating that there might be some pullback, but that is something that we did not experience in 2023. But as we view it, we want to make sure we're providing great value for our guests. It's something that's super important to us. We measure that value through our brand health survey 2 times a year. And I want to make sure that we're priced appropriately so that we can be a good option for a broad variety of consumers and across our over 300 restaurants in 24 states.

And are you seeing a consumer trade down -- it's a difficult trade to make a trade from CAVA to traditional fast food. Are you seeing trade from full service into CAVA?

We do believe that there is likely some trade from full service to CAVA. So what we're finding is that CAVA is able to provide a great value, a tremendous amount of convenience in a very experiential way. And so we're finding that we're filling a need for consumers to have our incredible bold flavors and cuisine where taste and health unite in a wonderful environment and that is something that, from a value perspective and something that we believe consumers, the modern consumer is looking for today.

It's interesting that your CAVA products are available in every Whole Foods in the country, even if the CAVA restaurant isn't there. So maybe there is some brand awareness and brand awareness maybe around the IPO and some of the great press that you've very well deserved. So talk about what it's like for CAVA to enter a new market, what some of the new unit volumes have been, the type of white space opportunity that you have from the current unit base?

Yes. From our perspective, we've got tremendous white space opportunity. And as we enter into new markets in 2023, we found that our new restaurants were highly productive. So those restaurants go into those markets, and we like to enter a new market with at least 3 restaurants. We'll be going into Chicago later this year with 3 restaurants. And that's something that provides us a lot of scale, both from an awareness perspective as well as a supply chain perspective, so you can get efficiencies in that production. And as you have a number of restaurants in the market, as you open more, the existing restaurants tend to grow as well as the new restaurant opens in a more productive way.

Your business model has taken some complexity, even some risk out of the restaurants themselves doing dressings, dips, spreads. Obviously, in your commissary, there's some other value-added activities that your suppliers do. And yet despite that, your prime costs as we look at them, food and paper plus labor is kind of in the mid-50s. It's excellent. So as we kind of think about the margin journey from here, I mean you're already in a top 1% type of a business even as we're talking about only 300 units on the way to some number of thousands, I'll say that. So where do margins kind of happen from here and when we talk about getting leverage in a market, getting scale and what have you, do you expect that to come through further prime cost growth -- prime cost leverage or do you -- or are there other fixed costs in the business?

So as we've talked about it, 2023 was a phenomenal year in many regards. So 17.9% same-restaurant sales drives a lot of efficiency through the P&L, and we were able to deliver very, very strong restaurant-level margins. But we also recognize what's important for a long-term sustainable growth is continued reinvestment in our consumers, in our team members for us to be able to continue to drive the significant returns over time. So we don't anticipate 2024's restaurant-level margin to be same level as 2023. But what '23 does is show the power of the model. So we'll make those investments in '24. And as we continue to grow, we'll see leverage in the P&L through the power of the model that we're able to deliver.

Okay. And is it your belief over time that you want to price less in inflation? I mean, philosophically, how do you think about using pricing relative to your labor cost and your food cost inflation?

Yes. So certainly, I talked about we're focused on investing in our team members as well as in our guests and pricing is one way to do that. And so we want to do everything we can to minimize that pricing so that we continue to be a strong value option for our guests, and that's how we'll approach it in the future.

Part of managing any brand is to expand use cases, both for existing customers, also for potentially new customers. I understand that you're working on CAVA 3.0. So could you talk about what those -- how those use cases might expand if you achieve what you would like with this project?

Yes. So it's really called Project Soul, and this is an opportunity to enhance our physical environment. So really aesthetically warm up the environment a little bit, that we think we have a chance to attract even more in-restaurant occasions. Tricia touched on some of the trade down from full service. And I think you're seeing some pretty significant secular shifts in our industry and a convergence of full service down into fast casual, where in the post pandemic and post inflationary period, the full service -- traditional full-service format is struggling to deliver a relevant value proposition to the modern consumer. And consumers are now looking and opting in and shifting into fast casual more where they can get that quality, relevance, convenience and experience in a place like CAVA and go out, whether it's before a movie, a family after a sports practice, certainly in our suburban and our smaller town markets and be a great opportunity in a physical channel. And these are the same guests that want to interact with us in a digital channel. And we don't think it's an either/or we think it's an and. Great digital channels and great physical channels where we put the power in our guests' hands to opt into their channel of choice depending on their need state because one day, it might be they want to drive around through one of our current 31 digital drive-through pickup lanes to pick up their digital order. Another day, they may want it delivered to their doorstep at their house. Another day, they may want to come meet a friend and enjoy a meal in our dining room that we're looking to enhance that aesthetic.

Do you have an -- so let me stick on the digital pickup lane for a second. Percentage of '24 and '25 openings with those lanes and do you anticipate full drive-thru ordering at some point?

So we do not anticipate full drive-thru ordering. We view what's in your hands through your device to be able to order from our restaurants, and it's much more efficient to be able to go through the line and pick up in that manner. Certainly, we see opportunities to create a more automated process through pickup. So we have -- can anticipate that you are coming through the line, so we're ready faster. And then as we think about '24 and beyond, and we'll have seen increasing number of pickup lanes as part of our portfolio, want to make sure that we're not pushing our teams to go into investment decisions that don't make sense in an attempt to hit a number. So we'll just make sure we optimize as much as possible if we make those choices.

And it is interesting. I mean, as you have more pickup lanes and perhaps attract more of a full-service customer, do the demographics of the concept change? We have in our notes, 60% customers are from the in excess of $100,000 income cohort, do you think some of these projects like the pickup lane, for example, a more Project Soul broadening the appeal down? Or do you think the opportunity is still to stay higher?

What we're finding is that we're able to broaden the appeal. We're now in 24 states across the country, and we're in markets like Fayetteville, Arkansas and Birmingham, Alabama, and Tulsa, Oklahoma and Baton Rouge, Louisiana. And so really finding that the brand is resonating in many, many other markets. A bit of the stats that you're reflecting is a function of our own development. So we started in markets like Washington, D.C., L.A., both in New York City, all of that was essentially elevating those stats. And as we grow and expand and mature, we're finding success in those markets that I mentioned and many, many others. I often say that we haven't found a market yet that doesn't love CAVA. And so that's great and really expands our opportunity and we use that to further inform our real estate strategy and our development approach over time.

Having 55 Academy GMs, is that the primary constraint of growth at this point? I mean, what is -- as you think about how fast, fast should be?

It's really talented GMs we think is the biggest governor to growth. We've got a great pipeline, great real estate development team. It's making sure we have qualified, talented leaders, which is why we've invested in our Academy GM program and continue to grow that to make sure that we have a pipeline that can support our growth aspirations.

Okay. And there were some changes made to hourly compensation, or at least the overall compensation structure for hourly workers this year. How has that been received? How is overall turnover and execution levels relative to where you would like the brand to be?

Yes, it's continuing to improve our turnover numbers and metrics. We're encouraged by the trends we've seen. And look, this is something that's been core to our DNA, something we've done over history. You can go back throughout our journey. In 2016, we took our national starting wage to $13 an hour, where many we're paying $9 and $10 in the states we were operating in. We were the first to give our team paid time off to vote. We were one of the first to deploy mental health benefits in January of '21 to our team members, whether they're on our health plan or not, available to all their family members. And we continue, as Tricia noted, to make reinvestments in our team to grow long-term shareholder value and restaurant-level margin. So we've seen the ability to not only drive turnover further down, but attract even higher quality team members to our business.

And how -- the labor scheduling sounds to be one part of it. You're making it more effective and efficient for employees to do their jobs and focus on guests at the time guests come in. That makes a lot of sense. But we hear other companies talk about use of automation and other types of equipment that can maybe speed up and simplify, maybe make some things less complicated just within the stores themselves around chopping vegetables or cooking meats or what have you. So the overall using equipment, using robotics, other changes of equipment, let's just call it, where are we in that journey? And does that make sense for the type of brand that CAVA is?

Yes. I talked about Connected Kitchen, more data-centric initiative, which I think is the most relevant near-term opportunity for us. We do think automation is an opportunity as a supporting actor, not necessarily a core or lead actor to our business. Remember, our mission is to bring heart, health and humanity to food. We are a restaurant. We talked about that in-restaurant physical experience. People love to interact with our team members, feel that Mediterranean hospitality. So what kind of automation can we deploy to free our team up to deliver on that hospitality. And that can be everything as simple and mundane as some things we've done in the last few years, which is automate the cutting of our pita crisp versus them manually cutting it. Or automate the slicing of our onions versus them manually slicing it. We talk about our production facilities, which is a massive automation facility. And then you can think about maybe on our second digital make lines but not necessarily our in-restaurant serving line because, again, we are a restaurant. We want to deliver that hospitality. So how does automation in the background free our team up to deliver that human connection.

Even automating the second make line is important considering 35% of your sales is digital. So is that something that is maybe behind the scenes being piloted or looked at? Do you have a specific project or a system in mind?

It's something we're always looking at. How do we incorporate automation, again, to improve our team member experience and the guest experience.

Okay. It's a big theme of this event. So -- thank you for that. Many of us know Ron Shaich, me for many years, as your Chairman, obviously, the founder of Panera and the person who sold that business. So going through Ron's experience of Panera and obviously, his deep experiences, and hopefully he's listening, well expressed opinions, what are the types of things as he has -- he led you through at least some parts of the business, including buying Zoe's. What are the important lessons that you have gotten from him and other support that you've gotten from the Board? And how you're feeling about your overall C-level management team at this point?

Yes. We have a tremendous board, including Ron, who's our Chairman and his advisement has been invaluable, right? He has climbed the mountain we are trekking up. And for him to be able to help think -- me think through where we want to take this business and what we need to be doing today to make sure we're just as successful, if not more in 3 or 4 years from now. I often say I've had to reinvent myself 4 times from start-up CEO to growth CEO to private enterprise-level CEO to now a public company enterprise-level CEO. And so I've had to change high run the business and having that advisement and how to think about where I spend my time, how I lead the business, how we prioritize, how we focus and where there might be challenges lurking around the corner as we get to now 320 restaurants or 500 restaurants or 1,000 restaurants because the numbers we're putting up now, they're a byproduct of all the work we did a couple of years ago. So what are we doing today to make sure those numbers are the same, if not better, a couple of years from now.

Okay. And other composition of the board and just your current completion of your C-level team or the other functionalities?

Yes. So I'm very fortunate. Tricia is sitting up here with me. We have a tremendous leadership team, executive leadership team I have been able to recruit over the last few years. We brought on a CIO last year with a lot of these more significant tech initiatives to make sure we've got the right leadership in place, Beth McCormick. And we will, in short order, be bringing on a Chief Development Officer. That will be the final piece of our leadership team. We have a tremendous head of real estate and great head of design and construction, they do a phenomenal job. They will roll up to this new Chief Development Officer. As we accelerate our de novo growth in the out years, we want to make sure we have that experienced singular leader to lead our development strategy.

Yes. I've heard some companies talk about advantages and disadvantages of scale, particularly around tech. That company 1/10 the size needs to spend the same amount of on their tech stack as a company 10x larger. I guess is that your opinion? And is kind of the first point. And secondly, as we think about longer term, G&A out of the restaurant types of leverage. How do you think about organizational spend relative to your overall revenue growth?

Yes. I'll speak to the philosophical approach and Tricia can kind of weigh in from the CapEx perspective. We look at a hybrid approach. It's build versus buy, very much like we do with our culinary in our 4 walls. Where do we add value versus where the partners at value? And so for us, we built our own digital order ecosystem, but we integrated a loyalty engine from a third-party partner. And so that's how we view it. We always weigh the pros and cons, what makes sense for us to build in our own stack and then layer in and incorporate third-party partners for the most effective, efficient tech stack. I'll let Tricia weigh in on the CapEx piece.

Yes. So from a CapEx perspective, we carry on with what Brett was saying. And when you think about 2023 in our CapEx spend, that spend had a lot of money in it for Verona. So it's over a $30 million investment in that facility. We have been at fortunate position that all along, we've been investing ahead of our growth. So I don't anticipate a need for significant CapEx spend as we move forward. Same thing on G&A. So I would anticipate our G&A growth to be at a lesser rate than our top line growth.

Okay. And obviously, this is a very high-returning box. I mean it is something where systems have been firmly put into place as is controls. I understand your supply chain has its specific controls as well. So the box at least on paper makes, one, it makes sense for franchising, from a franchisee's perspective, does it make sense from a corporate perspective? And as you think about just, let's call it, non-U.S. opportunities, is there demand for this brand outside of the U.S. as you currently see it?

Well, we think it's certainly a global cuisine, but we're focused on domestic growth for the foreseeable future. Our goal is 1,000 restaurants by 2032. So we think we have tremendous white space opportunity and growth staring down the barrel of in the U.S.

And whether franchisees perhaps in some markets that would take you some time to get to, if ever?

Well, I like to say I reserve the right to evolve my opinion, but -- and this is the great thing about our industry, right? There's a lot of different ways to success, franchise, corporate-owned, half and half as Ron had at Panera. But right now, with the kind of cash-on-cash returns we're able to generate, the opportunity we have that we are creating and defining what we believe to be the next large-scale cuisine category with an aspirational brand positioning, we think the corporate growth model is the right one for us.

You worked with 3 creative founders. I mean does their creative urge still exist? And are there other non-CAVA ideas that, even if they're on an informal basis, ever discuss with you.

I'm also -- so I said I'm fortunate to have an amazing executive team, and I'm blessed to have amazing co-founders and partners. Ted Xenohristos, one of my co-founders. He's our Chief Concept Officer. He leads our culinary innovation team, including our other 2 co-founders. So all that great delicious CAVA food innovation that you see us pulse out is thanks to my co-founders.

Okay. So I guess that's a no on another concept.

Yes, we have such opportunity with this concept. I think, again, we're so focused on it because I don't think these opportunities come along so often where we can truly define and create a new large-scale cultural cuisine category and have our brand be synonymous with it that we believe will long outlive us.

Okay. Very interesting. So urban versus suburban, I mean, something we haven't really talked about in some time. Stores in D.C., New York, Boston, what have you. But much of the success and the growth is actually going to come from suburb. So as we kind of think about the overall footprint over time, where this business should be growing, how do you expect the overall footprint to evolve?

Yes. So our expectation is that our growth will be largely 90% suburban and 10% urban as we go into new markets. The beautiful thing about the brand is we can be successful in both places. And so while the suburban markets have a slightly higher cash on cash return, generally because of the higher occupancy cost in urban locations, we just see lots of opportunity in many, many markets across the country.

And it is interesting and because I happen to have gone to it in Woodland Hills. I mean, one of your first units was in Los Angeles, which was a notoriously difficult market to do business. So are there any specific challenges in -- I'm just going to use California as an example, it's easy to pick on now. Are there any specific challenges within a market, whether from a cost or a demand, difficult regulatory opening kind of perspective that really have your attention to say, "Hey, listen, this is maybe where CAVA is not as easy or as clean of a story as it could be in other places?"

Fortunately, we took a very contrarian approach and went into a lot of those markets early in our career, so that makes expanding into other markets a lot easier. So there are markets that we're shying away from for those reasons, and again, just evaluating opportunities. And when we look at the country, we look at the factors in determining where do we want to go to next and whether those are unemployment factors or challenges overall, but we haven't done anything that would prevent us from going into some of those.

So you've been public less than a year, but are there any misconceptions in the public market, maybe things that people don't appreciate in the public market that you would like to take a minute and give your opinion?

I think we've seen and grateful to see a lot of appreciation in the public market for what we're building. I think if there's anything, it's just how passionately we believe the long-term opportunity and white space opportunity of Mediterranean and how broadly this cuisine appeals. As we -- as Trish talked about, how it's -- as we broaden out in the country, where we're seeing this resonate as we continue to broaden out, it's pushing down the income strata. How it resonates by gender, by ethnicity, by income levels, by generation. So this is a big, broad appeal cuisine that we think has tons of runway to go in this country. So I think that might be something that we appreciate that we've seen continue to be the kind of snowball rolling downhill for the last 14 years that we think is just continues to gain steam.

And I do think that's a consensus view, but that's a good thing. Thank you.

Thanks, John.