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FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.
Forget artificial intelligence or robotaxis. Return-hungry investors may want to look to their lunches for inspiration.
A fast-casual restaurant duo in the United States – salad peddler Sweetgreen and Mediterranean-inspired establishment Cava – are proving that you can beat the crowd without tech stocks.
Sweetgreen shares have more than tripled in the last 12 months. Cava shares have enjoyed an even more dizzying run, rising more than 300 percent to trade at a record high. That beats even tech favorite Nvidia’s 232 percent rise.
The evaluations are overwhelming. Cava, which just last year recorded its first annual profit, multiplies by almost 300. Sweetgreen has a market capitalization of $4.1 billion but is not yet profitable.
This rally may not stay fresh. In the restaurant sector, sales and footfall are falling as customers reduce spending. Price increases can no longer offset the problem. McDonald’s, Yum Brands, which owns KFC, and Olive Garden’s Darden Restaurants are among the chains that reported a drop in comparable sales in their most recent quarter. Bankruptcies are also on the rise, with BurgerFi and Red Lobster among the high-profile names that have filed for Chapter 11 protection this year.
But the bleak backdrop also explains why the two chains (and their strong sales) are generating buzz. Same-store sales rose 9 percent at Sweetgreen and 14 percent at Cava in the second quarter. Revenue grew even faster, 21 percent and 35 percent.
Investors looking for the next Chipotle have focused on these numbers. Chipotle shares have generated a return of nearly 6,700 percent since its initial public offering in 2006.
Comparing Sweetgreen and Cava to Chipotle isn’t entirely out of line. The two clearly borrowed their concept from the Mexican-inspired chain. Like Chipotle, both companies have a limited amount of fresh ingredients on their menus and customers customize their meals with an assembly-line process. The model helps keep labor costs, food waste and wait times low.
But the comparison doesn’t quite add up. While restaurant-level margins at Cava and Sweetgreen are comparable to Chipotle, the gap widens once administrative overhead, expansion and marketing costs are taken into account. Cava’s operating margin is less than half that of Chipotle. Sweetgreen’s is negative.
Meanwhile, Chipotle’s market capitalization is equivalent to $23 million for each of its 3,500 stores. Compare Cava: with a market value close to $15.6 billion, each of its 341 restaurants is worth $46 million. This despite the fact that each store generates only about $3 million in revenue per year on average. This is too rich an assessment to assimilate.