Fast-casual chains continue to outperform the broader food industry in growth as value-conscious diners demand affordable prices and experiences.
Mediterranean chain Cava (CAVA) beat Wall Street estimates Tuesday afternoon, with same-store sales up 18.1%, versus 12.39% expected. Shares rose more than $172 per share, an all-time high, on Wednesday, before giving up gains and closing around $147. Cava shares will rise 261% in 2024.
“That value proposition [is] really beyond price,” CEO Brett Schulman told Yahoo Finance. Schulman pointed to Cava’s investment in digital and in-store experiences, people’s changing preferences for healthier foods and the company’s efforts to keep the plate average in the range of $13 to $15 as factors in their success.
TD Cowen analyst Andrew Charles wrote in a client note that Cava’s price increase, of about 15% compared to 2019, “is significantly behind” increases of 25% to 30 % of most of its fast-casual peers. In the quarter, the chain’s in-person traffic increased 10.3% year over year, while its meat option contributed to order prices increasing 7.9%.
Burger chain and fast-casual player Shake Shack (SHAK) posted same-store sales growth of 4.4% in its latest quarter, while salad chain Sweetgreen (SG) saw a 6% increase.
As the cost of meals rises, fast food players have been struggling to compete on value. In its latest quarter, McDonald’s (MCD) comparable sales grew 0.3% year over year in the United States.
Restaurant Brands International’s (QSR) U.S. business saw same-store sales declines across the board, with Burger King down 1.5%, Popeyes down 0.8% and Firehouse Subs down 3.7%.
All three Yum Brands (YUM) brands posted mixed results in the United States: Taco Bell’s same-store sales rose 4%, while KFC’s business saw sales fall 7% and Pizza Hut saw a 1% drop. %.
Charles said Cava “continues to benefit from the shift in consumer preference from quick service to fast casual, as middle-income consumers increasingly view fast casual as a better value for money.”
“CAVA is at a clear inflection point as a leader in the fast-casual Mediterranean,” William Blair analyst Sharon Zackfia wrote in a note.
In the third quarter, Shake Shack beat Wall Street estimates with its same-store sales, driven by an increase in in-person traffic, of 30 basis points year over year, while the average check increased 4%.
“We’ve actually seen growth across all cohorts…we’re one of the few brands whose value perception has actually improved over the last year,” Shake Shack CEO Rob Lynch told Yahoo Finance.
Fast-food giants have been aggressively pushing promotions to win on price, but Shake Shack is competing by leaning on premium products like the return of the black truffle menu.
Lynch plans to avoid price increases in 2025 as consumers tire of persistent inflation.
“We don’t want to take prices unless we have to… We don’t predict that much inflation going into 2025,” Lynch said.
Shake Shack shares are up more than 72% so far this year.
For Sweetgreen, its same-store sales growth was driven by a 4% increase in menu prices and a 2% increase in traffic and mix.
“We are focused on menu relevance and reinforcing our culinary and supply chain ethos to drive traffic and verification for the long term,” Sweetgreen CEO Jonathan Neman said on its earnings conference call.
The stock has soared 238% so far this year and there is more room to run, according to Zackfia. The chain is leaning toward its Infinite Kitchen concept, which uses a row of automatic dispensers to create salad bowls. There are currently 10 locations and the pilot has shown improvements in speed and product quality, Neman said.
Company co-founder Nicolas Jammet struck an optimistic tone about the launch of the automation technology on Yahoo Finance’s Opening Bid podcast (listen below).
“While Sweetgreen shares have more than tripled so far this year to an enterprise value of 5.2 times our 2025 sales estimate, we remain optimistic about the company’s growing appeal and Infinite’s innovative dynamics. Kitchen,” Zackfia wrote to customers.
However, not everyone is so optimistic after big rallies. Citi analyst Jon Tower cited a Neutral and High Risk rating for Sweetgreen and Cava.
Customers arrive at a Cava restaurant in New York City, U.S., June 22, 2023. REUTERS/Brendan McDermid ·REUTERS / Reuters
For Cava, downside risks include difficulties expanding its footprint as the commercial real estate sector faces challenges in an environment of higher interest rates or a possible slowdown in the economy. The chain could also have a “setback with new sales levers,” such as its meat and its loyalty system.
Sweetgreen’s risks include potential “sales disruptions” in urban markets like New York City, supply chain disruptions that could impact new store openings, and “elevated risk to sales related to an outbreak of transmitted diseases.” for food compared to other brands in the restaurant space, given the outsized exposure to produce.”
JPMorgan analyst Rahul Krotthapalli highlighted Shake Shack’s “premium/specialty burger category.” [that] inherently risks price-driven frequency capping,” meaning consumers might come less because it costs more.
He added: “The brand believes it has succeeded in changing this perspective for its casual consumer through the popular but risky high-low pricing strategy (as it trains customers to frequently wait for promotions).
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Brooke DiPalma is a senior reporter at Yahoo Finance. Follow her on Twitter at @Brooke DiPalma or email him at bdipalma@yahoofinance.com.
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