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

Good afternoon. I'm Danilo Gargiulo, the restaurant analyst here at Bernstein. And thank you, everybody, for being here. We are very excited for the first time here at Bernstein's Strategic Decisions Conference. CAVA is a Mediterranean [Indiscernible] operating 300 restaurants across 24 states, generating over $700 million in revenue and almost 60% more versus 2022. And with me today is Brett Schulman, Co-Founder and CEO of CAVA; as well as Tricia Tolivar, CFO. Before we start with my questions, I would like to remind everybody that you can submit questions through [Indiscernible] by either scanning the QR code that you can see in your agenda or by visiting [Indiscernible] with pass code SBC2024. And with that, let me start.

Brett, this is the first time you're here at the SBC, and it's quite rare to have founders on stage. So for those that maybe have not heard about your story or listen to the podcast how you build it, can you share what drove you to build CAVA and the learning so far in the different roles that you have assumed over time?

Yes. Well, first of all, thank you for having me. We're excited to be here. I actually worked in this world. I worked in finance about 10 years out of college and then left to embark on a more entrepreneurial career, which manifested itself in helping my wife grow natural snack food company. And then as fate would have it, a friend of mine from college called me one day and said, "Well, you talk to my cousin, Ted, he's got this restaurant called Cava Mezze, have you heard of it?" I said, "Well, I don't think so. So well, they partnered with the customer to sell their dips and spreads, they served in the restaurant and a couple of local whole foods." I said, "Oh, yes, we bought the hummus." We like it. It's great. So well, they're having a lot of trouble with that business? Well, you talk to them because you're dealing with the CPG business right now. So I connected with Ted Xenohristos, one of my co-founders. And Ted, along with 2 childhood friends, all sons of Greek immigrants founded that original restaurant in 2006 as their modern American perspective on their family's heritage and culinary. So I think small plates, mezze style, wine bar, and they had subsequently started to sell the dips and spreads, partnering with that customers and some local whole foods. That business had challenges. They asked me to consult -- come on board and consult. We were able to get that business profitable quickly. Me and the guys hit it off. And they said, Brett want to be our fourth partner at CAVA. I said, let me talk to my wife. It's kind of a different career change. And we went down, they had opened the second full service [Indiscernible] how diverse the dining room was, how broad this food appeals and how good I felt after eating it, satisfied but not stuffed. And I went back the next day and I said, "I'm in." Have you thought about taking this great cuisine, this unique Mediterranean cuisine where taste and health unite and put it in a fast health-based format, bring it to the world and Chef Dimitri, one of our partners said at the time. I've actually got this grill menu, but it's much more like the street food we visit our family in Greece. I love leveraging the healthy aspects of the Mediterranean pantry. So we spent about a year figuring out how that food would translate, ultimately settled on the walk the line format and raised some friends and family money to open 2 or 3 locations to prove out our thesis and fast forward 13 years later, and here we are.

And so what are the -- you took many different roles in this journey. So what are the decent learnings that you got from the moment you were co-founder of a small startup 2, 3 restaurants, as you mentioned before, all the way to now a public CEO running more than 300 stores.

Yes, I've said I've had to reinvent myself 4 times as a leader. First as start-up CEO, growth CEO, private company enterprise and now public company enterprise level and really required me to be different in different areas of the business, different roles in the business in every one of those stages, because when you're small, you're a group of 5 or 10 people making all the decisions together in a room. When you are enterprise, you have to learn how to affect your vision and your strategy through many layers of people and degrees of separation. And we lead 9,300 people today. And how do you get all those people going to the same direction towards the same common goal and the same purpose, and our same mission to deliver heart, health and humanity to food. So it's really been an unbelievable journey. And again, a continuous learning process. One of our values is called constant curiosity. So we want lifelong learners and constantly learn how we become better leaders. And fortunately, I've been able to evolve with the business.

And one of the things that you told me in the past in terms of your learnings was also understanding how to move the organization along with you. And so making some decisions, sometimes tough decisions on departure in a way that was actually helping the business grow -- so can you tell us a little bit more about that and how you're thinking about evolving your organization as you're scaling from here on?

Yes. I think the 2 biggest learnings along the way was, one, and I think we always try to stay in front of it was how you operate or what your success is at 5 or 15 or 20 restaurants doesn't necessarily translate to 100 or 500 restaurants. How do you scale it? And so we look at it and say, okay, this is working at 300 restaurants. Does it work at 1,000 restaurants? And then organizationally, you kind of take a similar perspective and say, somebody -- and there's -- it's not that somebody isn't a good professional. It's that they may be better oriented or better equipped to work in a smaller, more growth company. And they may not be happy in an enterprise company, right? They may not be happy trying to influence and effect and collaborate through others or cross functionally. They might like and enjoy being with 10 or 15 people making all the decisions together in a room. And sometimes folks don't realize that on their own, and it's very hard, and you can start to see it and feel it when certain people hit a wall or they're not able to keep up at the pace of the business. And those are the toughest decisions I think, for any leader, any manager is being able to give that direct feedback to folks who are struggling in their role and try and coach them up. And if they can't elevate to the expectations go in a different direction and make that recognition sooner rather than later because if you don't make those decisions. Ultimately, the business is going to be held back. Others and the team are going to be frustrated and the performance won't translate.

So hopefully, we're going to be talking about a few topics, including levers of growth for CAVA. But before we go there, what are the top 3 takeaways you would like investors to remember by the end of this conference?

Yes. We believe Mediterranean is the next large-scale cultural cuisine category. When you look at the secular trends in this country, whether it's the growing diversity of our population, and that's leading to people seeking more bolder adventurous flavors, right? Gen Alpha will be the first generation across the 50% paradigm of folks that identify with the ethnic minority group. And if you think about modern health and wellness trends and you put those 2 together, we kind of sit at the nexus of that. And that's why we think Mediterranean is the next large-scale cultural cuisine category as folks look beyond the mature categories of Mexican, Asian and Italian that I grew up with. I think secondarily that we've got this massive white space opportunity because of that and because Mediterranean has such a broad appeal. When you look at our demographics, our guest base whether it's gender balance, whether it's generational balance, whether it's the ability to appeal down the income strata, that allows us this proven portability that we now operate in 25 states in the District of Columbia. We operate in the city in the suburbs and ex-urban markets. Here in Bryant Park or in Back Bay Boston, but also in Fayetteville, North Carolina and Fayetteville, Arkansas. So it's been really amazing to see the receptivity in all these different geographies and types of trade areas. And then third and final, I'd say the robust infrastructure we've invested in and built in the business over the years that's translated to this powerful unit economic model. So we just opened our second manufacturing facility, our production facility -- fresh production facility in Verona, Virginia.

Verona, Virginia. Not Italy?

Not Italy, yes. And that complements our [Indiscernible] facility. In this new state of the art facility, it has a high-pressure cold processing capability -- so that's a kill step that allows us 60-day shelf life. So we're making our chef crafted dips and spreads, think that's tzatziki, fresh dill, fresh cucumber and garlic or Crazy Feta with jalapenos and onions. Similarly, how we made back in our 1,500 square foot humble commercial kitchen when we started. And so to be able to do that, deliver it at scale consistently and cost effectively and deliver that value to our guests across the country and take that complexity out of the 4 walls of our restaurants, we think is a huge piece of infrastructure and competitive advantage especially at scale in Mediterranean. And then you think about our digital investments and our technology investments. And so all this has come together, our direct source supply chain. It's now kind of flowed through as we ramp up our unit growth and our top line growth to create those powerful returns.

Excellent. Well, Tricia, let's talk about maybe your long-term algorithm. So how should investors think about your long-term algorithm? And specifically as well, what kind of markers are you looking at for you to be potentially expanding the upper limit of units from 1,000 stores by 2032 to more than that.

Sure. So our intention, as you mentioned, is to be at least 1,000 restaurants by 2032, and that would imply a 15% compounded annual growth rate. In fact, in our history in the past few years, we've grown much faster than that. So we leveraged the Zoe's acquisition to convert their locations and we're growing at 40% to 50% per year. So it is a bit of a step down, gives us some breathing room, but also gives us a higher degree of confidence and execution and our ability to move forward. That 15% restaurant growth, we believe that combined with same-restaurant sales growth will drive 20% on revenue growth over the long term at least and then even more from an adjusted EBITDA perspective and a growth perspective. And so all of those investments in infrastructure that Brett talked about have positioned us to be able to leverage that G&A, also experience as AUVs grow, expansion in restaurant level margins that will allow the bottom line to grow at a faster pace than the top line. Now when you talk about what is it going to take or what are we going to need to see to determine if there's an opportunity to grow even faster. Certainly, our new restaurant openings have been performing very well. So the sales of those locations have exceeded our expectations as well as the restaurant level margins. And we're evaluating that very closely to understand is that more of a normalized rate, more permanent? Or is that a benefit of the recent exposure that we've had whether it's related to IPO buzz or the expansion as we continue to grow and have more restaurants to increase in brand awareness. So we'll monitor that over time and make assessments. But the most important part for us to determine whether we're ready for growth is making sure we have the right people. Our team members and great GMs are what make us successful, our lifeblood of our business. And so making sure we've got that proper pipeline in place if there's an opportunity to lean into a faster pace of growth and that's something we'll evaluate as well.

And in the context of the restaurant market having some challenges in terms of traffic, you continue to compound. You had a 2.3% same-store sales last quarter. I'm wondering #1, what is driving this incremental traffic continuously coming into CAVA. And secondly, what gave you the confidence to increase the outlook for the year in the context of a slowing economy. So are you seeing no pressures in your business? And what's the evolution of the market going to be?

So a couple of things to drive traffic. And certainly, it's the combination of our amazing cuisine and great guest hospitality at our restaurants. We do have new restaurants in the base that contribute to same restaurant growth, but increasing awareness and excitement around the brand. So there's a lot of activity around there. People love CAVA, and we're finding success in that, and that drives traffic and they tell their friends and they come in and they just -- it sort of snowballs. So that's super wonderful as well. When we looked at guidance, we delivered 2.3% in same-restaurant sales in the quarter, and we feel very confident in our ability to deliver 4.5% to 6.5%, and that's a combination of factors. It's the same restaurant sales growth strength that we're seeing in our results today, as well as the introduction of steak as we launched in June. So June 3, you go out and try in any of our restaurants, our new grilled steak is absolutely incredible. And we believe that what we built into that same restaurant sales is the mix impact related to that. But -- so it's the momentum, the new culinary offerings as well as just making sure that we're also being thoughtful about anniversarying the strong traffic trends we had in the summer of last year around the IPO. So there was a lot of excitement and momentum around the variant, a lot of impressions that were generated in a lot of press. And so we wanted to say -- as we get past June 15, we'll make sure that we can hurdle that too.

Awesome. And it sounds like not only consumers are appreciating CAVA, but also investors. The stock has doubled -- more than doubled since last year. So can you help us understand what's your view on what still not fully appreciated by investors today.

We try not to get distracted by the stock price. We talked about the IPO as being not the destination, is the next chapter in our evolution, in our journey. And we talk to our team members all the time about how to stay focused on the business and our strategy in executing and deliberating -- delivering on that Mediterranean hospitality in our concept essence. So I think that what tends to be underappreciated is really the proven portability that we have, the whitespace opportunity that lies ahead of us and our ability to continue to execute and deliver on all of those opportunities.

Brett, maybe building on what Tricia was mentioning, what do you think are the top 3 opportunities for CAVA today?

I think it's continuing to drive awareness. I mean when you look even in our most mature market, we're at 67% awareness that we've been in over 14 years, a lot of newer markets that we entered, we only had 20% awareness when we entered, roughly [indiscernible] now when you look at more mature chains with thousands of restaurants, some of our peers, they're more in the mid-90s in awareness. So I think driving awareness, driving awareness around what we're doing in Mediterranean is a huge opportunity. I think, obviously, new unit growth, as Tricia talked about, we think we have a massive white space opportunity in front of us. And it's just incumbent upon us to do it at the right pace and understand the right pace of growth because our industry is littered in history with brands that grew too fast and it compromised operational and food -- integrity and food quality. And that's the quickest way to really undermine that growth. I think third is continuing to innovate like we've innovated over the years. I think we've just kind of exited a decade of digital transformation. We were, I think, on the leading edge of that in our industry when we came, we founded the business. We started in 2011 and we had a humble online ordering website that I think 2% of our revenue is coming through. And then in 2013, we were one of the first, we had a White Label mobile payment loyalty app. And then in 2015, we put second dedicated digital make lines for digital production in every restaurant. In 2017, we brought the app in-house and built our own digital order ecosystem. In 2018, we started building digital drive-through pickup lanes, which we have 38 today. In 2021, we started rolling out digital menu boards and new restaurants. And in '22, we replatformed our digital ecosystem to a highly scalable microservices architecture. So fast forward to today, and 37% of our revenue comes through those channels, and we'll do roughly somewhere around $300 million in business this year through those channels. I think we're on the precipice of another decade of transformation, this time with data transformation. And so we talked a little bit about our connected kitchen initiative that we're going to pilot in 4 restaurants later this year. And I think when you think about both operational efficiency, guest interaction and personalizing the communication and relationship with our guests, even as we scale. And then business insights and intelligence in real time to take -- to create actionable items to really be effective in us leading the business can unlock another kind of powerful step function change much as digital did in the last decade.

Can you also talk about how your go-to-market strategy is evolving over time? Because the awareness that you're seeing in Chicago, if I remember correctly, it's north of like 40% before, maybe like 36% or 37% before you even open the store. And so what has changed about how you're communicating to your consumer, not only from a kind of media outlet standpoint as well as from a marketing communication and community engagement.

Yes. It's a great question because we've seen unbelievable response in Chicago, and the team did an amazing job. But first, I'll step back and say, look, when we were talking about going public and we thought about this for a couple of years, and we didn't necessarily have to go public and people said, well, do you want to go public, you're the downsides of the public markets, but...

Just like being on stage with me.

I got to spend time with [Indiscernible] one of the things that we believe that I think has totally played out was that we thought this was a great story for the public sphere that as a consumer-facing brand, trying to define and create a new category and elevate to a national level, that being in those public markets would really help amplify that message and elevate our brand. And that has absolutely played out. So that's been a nice tailwind. As it relates to Chicago specifically, we worked on a new restaurant opening marketing plan rollout, where our PR team has done an amazing job this year. We started to put more resources against not just more national press, but having local on-the-ground community press to engage those constituents in the neighborhoods, as well as some influencer marketing, always do targeted digital marketing, but something we've done since our very earliest days is what we call our community days. So when we go and open a new restaurant, we invite our new neighbors to our table for a free lunch or dinner service. We recommend donations. We don't require it, but if you make a donation, we'll match it and it goes to a local philanthropic partner that we partner with that's addressing food and security in that market. So that also creates great conversation, great word of mouth. And one of the other things we did in Chicago was we added additional training resources for a bit longer period of time. I think that allowed us to put our best foot forward, handle the volumes that we saw and have more of those community day programming than we typically do at a restaurant. So we're taking all these different learnings. We did do some out of home. We did a couple of billboards. We also had some other out-of-home activities like a train station takeover that we pulled back from because we just don't need to drive more people in the restaurant right now. So it's a good problem to have. But we're taking these different learnings and say, how do we apply it as an ABC model to different size markets as we open those new markets. But the press we received was amazing. I mean, to go into a market like Chicago, and open a restaurant like that and be able to kind of own the cultural conversation around the opening in a market as big as Chicago was really a credit to the team's work.

Can you also maybe talk about the media itself, how you're shifting away maybe from traditional media and paving a way or maybe partnership with influencers and how you are developing your social media presence. It's something we've leaned into over the years. I think that's been our strength. Our social media team is incredible. TikTok is a very powerful platform. I mean it's fascinating. It's scary at the same time, but the amount of virality and awareness and impressions and consideration that you can drive on that platform at no or -- minimal or no cost is crazy. I talked about on our earnings call this week, our team member Grayson in our Sherman Oaks, California location, a creator, Cody Premer came in. Grayson did not know who he was. We have something what we call the love button. This is something we've had in our very first restaurant, where we empower our team members 4x a shift to comp a guest meal. It can be a guest that looks like they're having a really bad day. It could be a guest that maybe it's their first time and they're confused and they're not certain that they're going to like what they ordered. It could be a guest that their phone died, they're trying to mobile pay or they forgot their wallet. And we've seen this be powerful. We've seen some viral videos about this, but Cody Premer walked in, he said, "great, so make me your favorite bowl." And he's talking, and they're going down the line and Grayson said, "Hey, it's on us. We got it today." And Cody loved the bowl, gave it 10 out of 10 food and experience, and TikTok responded unbelievably, it went viral just because look, we think we have amazing unique cuisine where taste and health unite, but part of our core concept essence is our Mediterranean hospitality that hospitality partners deliver in that original full-service restaurant. And Greyson was able to deliver that and it really connected with people from a humanity standpoint and that video has 37 million views now. So you think about that, 1 free meal, 37 million impressions, 37 million views.

And it was interesting because there were a lot of posts on TikTok, please don't fire Greyson. No, that's what we want -- our team members to do. So it was interesting.

And then we had my partner, Ted. We did a video on our TikTok feed thanking Greyson, congratulating them and sending them a gift, so making sure people didn't think we're going to fire him. So we've really leaned into -- we just did with 100 different NIL college athletes across the country, certainly ones around our college campus locations, where not necessarily the high-profile expected athletes, but a real great mix, whether it was a women's softball player in Louisiana or a basketball player or a gymnast or a football player or baseball, like we covered all sports to show the broad appeal of our brand and some of these more micro influencers with say, 15,000 to 25,000 person followings can be really effective because their audiences are super engaged. And I think for us, it shows up in a much more authentic way. We want people who are true fans of the brand. We did this 2 years ago with Emma Chamberlain. Emma is a very high-profile influencer. She does a lot of high fashion brands now. But back then, when she was doing her YouTube videos, our team spotted our dips and spreads in her refrigerator. They DMed her, she responded right away. We wound up collaborating on Emma's fire bowl and brought in our spicy hummus from our grocery channel into our restaurants. And it's just a really interesting way because I think the funnel is changing and consideration is a huge aspect now of the marketing funnel. And you can drive incredible consideration across these social platforms. And look, that's where our Gen Z audience is spending a lot of time with their eyeballs. So we want to be in front of them there.

And this conversation started from Chicago, which you meant it's probably one of the biggest openings that you've had, especially in a larger market. And can you maybe, Tricia, can you talk about your development goals. So how many of your new units are opening and generating 35% cash-on-cash returns and more. And secondly, where are you seeing greater returns for your incremental units?

Yes. So our real estate strategy is designed to generate at least 35% cash-on-cash returns, and we're seeing -- we're exceeding those returns themselves. And our strategy looks more broadly at the country and puts all of our DMAs into 1 of 4 buckets, established, growth, emerging or greenfield. And so greenfield are those locations -- those markets where we have no CAVAs at all, established conversely would be those where we have more density. But we see opportunities to grow in all 4 of these buckets. But what we've done is established parameters about how many locations in our pipeline will fall into each category. So we don't over-index one way or the other. And so greenfield is about 20% of our pipeline and that is largely because new locations tend to have a little bit lower levels of restaurant level margin. And so we want to make sure we don't over index on that and disrupt the brand overall. But what we're finding is those restaurants are performing better, like I mentioned earlier. So considering revisions to that and just making sure we're addressing it appropriately. But when you look at cash on cash returns and differences, one of the other criteria we have are how many restaurants we're going to open in suburban versus urban environments. Our suburban restaurants where 90% of our portfolio is targeted. They tend to have higher cash on cash returns. They have slightly lower cost of actual capital costs to open those restaurants themselves, and their occupancy costs are lower, and so therefore, it generates a better restaurant level margin and stronger returns. Ironically, the AUV difference or the AUVs of a suburban location aren't much different than an urban location. And then again, that drives a better return overall, hence, giving us the desire to have 90% of the portfolio in those markets.

What about the AUV between the different types of stores that you want to open. So if you look at greenfield versus the others, can you help us understand the difference in AUV that...

What we do from a strategy standpoint is we use tools and our team members' experience and the operators influence on how do we target the AUV for each restaurant. So we don't necessarily say AUVs are different, whether they're established, growth emerging or greenfield. It's more around the demographics, the psychographics, the environment where those restaurants are and then we set targets for those. A greenfield market in theory would start out a little bit lighter because you don't have the brand awareness. And so those AUVs are just slightly lower. Historically, we've communicated our year 1 AUV is around $2.1 million, and then that would grow by 10% to $2.3 million in year 2. And then with that $1.3 million investment, it gives you with those margins that I talked about a 35% cash on cash return. As I talked about earlier, we're seeing performance better than that. So we're going to continue to review and refine our models and we'll make updates if it makes sense.

Great. But I know that you don't particularly love the deal franchising here in the United States in order not to give up the opportunities that Tricia was mentioning, this cash-on-cash returns. But on a longer-term perspective, are you evaluating any franchising opportunities maybe in international markets as -- when you're ready to get into other countries as well? Or are you expecting to deploy more of a Chipotle approach, which is also owning the relationship and owning -- operations in Canada, France, Germany, U.K. and so on.

I always say I reserve the right to involve my opinion, but we're focused on corporate growth. We do have 2 franchise -- not franchise licensed locations at airports, we're opening a third at LAX. It's under construction right now. So those are license deals. We think our cuisine is a global cuisine, and we think it's got tremendous opportunity internationally. We've got such significant domestic growth if that's what we're focused on for the foreseeable future. I think if and when the time comes for international, we would look at all options, whether there's a great in-country partner that understands the market better than us that we could leverage that we trust with our brand or it's something that we want to go tackle on around.

And what are the key expectations for you in the new hires that you had in your organization, especially recently, you had a new Chief Development Officer. Help us understand what you're putting on their KPIs, so can understand the growth.

Yes. Look, I said earlier kind of my evolution as a leader in what I've learned. And I had enlightening moment when we had bought Zoe's, and it was 3x our size, struggling public company at the time. And we went from -- we were around 60-plus restaurants at the time to running 2 brands in almost 300 restaurants overnight. And that was a very painful growth experience for me personally. I say 2019 was the hardest year in my career. And when I was able to recruit our Chief People Officer and subsequently recruit Tricia, I'm like, oh, wait, this is the kind of executive that exists and that I can have, and they had this large enterprise company experience, and I saw how it elevated me, how it elevated the organization. And we've worked very hard as we've built the executive team over time to do what we create -- what we call a high-performing team. So we work on this high-performance teamwork, where I challenge the executive team to be my office of the CEO and exhibit enterprise leadership and think like I have to think so that people aren't thinking from a functional perspective. They're thinking from a cross-functional enterprise perspective. And we worked very hard as a group and as a collective to do that and own the strategic plan together. Now certain executives are sponsors on certain initiatives, but we own it as a collective. And now we're at a point of pushing that high-performance work down the organization and getting the layer below us and the layer below them, operating as those kind of similar collectives in an enterprise leadership fashion. So that's what we hold our executives accountable to. I think life's too short to work with people that you don't enjoy working with, and to be in confrontation with folks. And so we want people who are waking up every day to accomplish something great that believe in our mission to bring heart, health and community to food and enjoy doing it with the people that we're doing it with.

And given the new hires and also the evolving dynamics in the organization that you had. Can you help us understand which parts of the organization you think have an underappreciated and top opportunity that from here on, you could be doubling down and potentially elevating CAVA even further?