Two restaurant-related stocks with the potential to yield substantial wealth.
When it comes to investing in restaurant shares, investors are constantly seeking the next Chipotle Mexican Grill (CMG 1.14%) or Starbucks (SBUX 0.27%), two significant success stories within the sector over the past 15 to 30 years. These two stocks have made many investors millions by buying in at their early stages and holding on to their shares.
Let's scrutinize two potential stocks that could mirror these renowned eateries and become the next million-maker restaurant stocks.
1. Dutch Bros Coffee
Similar to Starbucks, which originated in Seattle, Dutch Bros Coffee (BROS 1.77%) traces its roots to the Pacific Northwest, specifically Oregon. However, Dutch Bros isn't aiming to replicate Starbucks' upscale coffeehouse style; instead, they focus on smaller stores that primarily rely on drive-thru traffic.
Approximately half of Dutch Bros' sales stem from coffee beverages, with a quarter coming from its Blue Rebel energy drinks and the remaining portion from other drinks such as smoothies and lemonade. The company is just beginning to explore food options, which currently account for less than 2% of its sales. This presents a significant opportunity for growth.
Dutch Bros posted impressive Q3 results, with same-store sales rising 2.7%, and 4% for company-operated stores, despite efforts to redirect some traffic from existing stores to new ones. The company projects 4.25% same-store sales growth for the year. Dutch Bros has also recently introduced mobile ordering, which should contribute to an increase in same-store sales.
The key driver for Dutch Bros, potentially turning the stock into a million-maker, is its store expansion plan. The company closed Q3 with 950 stores, with 645 of them being company-owned, and aims to grow to over 4,000 locations within the next 10 to 15 years. Despite this, it remains far shorter than the nearly 17,000 Starbucks stores in the U.S. alone.
Dutch Bros' compact stores are inexpensive to build, and the company is currently generating free cash flow, enabling it to implement its expansion strategy without incurring debt. While its stores are smaller, with average unit volumes (AUVs) of $2 million, they currently generate more revenue per store than Starbucks' $1.5 million AUVs at its U.S. locations.
With a market cap of around $8.5 billion compared to almost $114 billion for Starbucks, Dutch Bros offers substantial long-term growth potential for its shares.
2. Cava Group
Investors have long searched for the next Chipotle contender, and they may have found it in Mediterranean fast-casual restaurant operator Cava Group (CAVA 0.16%).
The restaurant chain employs a strategy similar to Chipotle's, offering a limited variety of ingredients that can be customized into numerous personalized options, helping to keep costs in check and improve efficiency.
Cava compares favorably to Chipotle in several critical restaurant metrics, such as AUV and restaurant-level margin (RLM), which measures the profitability of restaurants before corporate costs. Cava's AUV of $2.8 million isn't far behind Chipotle's current AUV of $3.2 million, despite Cava's larger size and widespread popularity. Meanwhile, Cava's RLMs of 25.6% in last quarter were similar to Chipotle's 25.5%.
Similar to Chipotle's early days, Cava has experienced strong same-store sales and traffic growth. Q3 saw same-restaurant sales soar 18.1% with guest traffic increasing 12.9%. Impressively, this followed a 14.4% increase in same-restaurant sales a year earlier.
The primary opportunity for Cava, like Dutch Bros, is its expansion plans. With just 352 locations at the end of the last quarter, there's significant room for growth. Cava, too, boasts solid free cash flow that can fund its growth without resorting to debt.
Critics of Cava stock may focus on its valuation, which translates to approximately $44.5 million per location for restaurants generating under $3 million annually in sales. However, the long-term growth potential lies in its expansion plans.
By comparison, Chipotle boasts over 3,600 restaurants and continues to open more than 300 new locations each year. If Cava manages to grow at a similar pace and maintain its AUVs and RLMs, it could reach Chipotle's size within the next 10 to 15 years. Chipotle currently has a market cap of $80 billion compared to Cava's $15.7 billion, indicating that while the stock appears expensive, its long-term upside remains considerable.
- For those considering investing in the food sector, Dutch Bros Coffee's financial performance and expansion plans could be an attractive opportunity, offering the potential for significant returns akin to successful restaurant stocks like Starbucks.
- With its focus on cost-effectiveness and efficiency, Cava Group's performance in Q3 and similarities to Chipotle's early days have caught the attention of investors. If Cava manages to grow at a similar pace as Chipotle, its expansion plans could create substantial long-term growth potential for its shares, making it an exciting investment opportunity in the finance of the food sector.
