Chipotle and Cava Are Market Darlings: K. S. and G. R. Group Could Follow Suit

Posted on by Henrik

In the restaurant industry, Chipotle Mexican Grill (NYSE: CMG) and Cava Group (NYSE: CAVA) have garnered significant investor enthusiasm, evident from their impressive stock performance. Over the past year, Chipotle’s shares have risen by 70%, while Cava’s have soared by an astonishing 150%. Both companies have demonstrated remarkable business success, characterized by high profitability and consistent growth in popularity, measured by same-store sales (comps).

Chipotle and Cava’s Success Factors

  • Profit Margins: Chipotle reported an operating margin of nearly 28% in Q1 2024, and Cava reported a 25% margin.
  • Growth in Comps: Chipotle’s comps grew 7%, and Cava’s grew 2% in Q1 2024.
  • Expansion: In 2023, Chipotle opened 271 new locations, and Cava opened 72.
  • Valuation Concerns: Despite their success, both stocks trade at high price-to-sales (P/S) ratios—9 for Chipotle and 13 for Cava.

For investors seeking similar growth and profitability at more attractive valuations, Kura Sushi (NASDAQ: KRUS) and Gen Restaurant Group (NASDAQ: GENK) offer compelling opportunities.

1. Kura Sushi

Kura Sushi is a major sushi chain in Japan, with over 500 locations. However, its presence in the U.S. is much smaller, with only 59 locations as of the end of its fiscal Q2 2024. The company plans to open 13 to 14 new U.S. locations this year, aiming for a long-term goal of 400 locations.

Key Points:

  • Innovative Dining Experience: Kura Sushi uses technology such as conveyor belts for food delivery, robots for drink service, and toy-dispensing machines, creating an “eater-tainment” experience.
  • Sales Performance: Fiscal Q2 comps grew by 3%, and fiscal 2023 comps grew by nearly 10%. Each location averages $4.3 million in sales, surpassing Chipotle and Cava.
  • Profit Margins: The restaurant-level operating profit margin was 20% in Q2.
  • Valuation: Kura Sushi trades at a P/S ratio of 4.5, which is half of Chipotle’s and significantly lower than Cava’s.

2. Gen Restaurant Group

Gen Restaurant Group operates the Gen Korean BBQ chain, which currently has 40 locations. Despite its small size, the company has ambitious expansion plans, aiming to open at least eight new locations this year, ten next year, and around 15 in 2026, with a long-term goal of over 250 locations.

Key Points:

  • Unique Dining Experience: Diners cook their food at the table, offering an interactive and engaging dining experience with unlimited food at set prices.
  • Operational Efficiency: Gen installs its own ventilation systems, reducing costs and speeding up restaurant build-outs.
  • Sales Performance: First-quarter comps were down nearly 2%, but the high average sales volume of close to $6 million per location indicates strong performance.
  • Profitability: Gen Korean BBQ is already profitable, with $11 million in net income in 2023, achieving a profit margin of over 6%.
  • Valuation: Including both classes of stock, Gen trades at less than 2 times sales, making it cheaper than both Kura Sushi and its more renowned peers.

Conclusion

Chipotle and Cava have set high standards for profitability and growth in the restaurant industry. However, for investors seeking similar qualities at more reasonable valuations, Kura Sushi and Gen Restaurant Group present attractive alternatives. These companies share many of the appealing traits that have driven Chipotle and Cava’s success and offer significant upside potential.