Most people know that the restaurant industry is a tough business, with a relatively high failure rate. Only about half of newly opened restaurants are still in business a few years later. That’s disheartening, to say the least.

So what separates the industry winners from the losers? Of course, details such as price, location and quality of service are important. But perhaps more than anything, it’s the concept itself that makes a restaurant reliably marketable. Finding an idea that strikes a chord with consumers removes one of the company’s most important hurdles.

Given this, investors looking for a new, off-the-radar growth option should take a stake in it Cava group (CAVA -1.87%). This growing chain of Mediterranean restaurants has already delivered a lot to its first shareholders, but there is much more to offer.

What is cava about?

If you’ve never heard of Cava, you’re not alone. It has only been around since 2010 and most of its expansion has taken shape in recent years.

Of the 341 locations that were operational in mid-July, 62 have already opened in the past four quarters. One of the main reasons why the company went public in 2023 is to facilitate new store openings.

But what is it? Simply put: Mediterranean dishes. Cava’s pita range includes distinctly Americanized options such as chicken or steak, while feta cheese, lamb and avocado differentiate the menu from most domestic competitors. It also offers meal salads, rich in ingredients such as olives, tomatoes and hummus.

While these are all technically “sit-down” meals, they are also useful for people who are in a hurry and/or on the go. Cava’s menu items are also affordably priced, in the same ballpark as more traditional fast food offerings today.

Whatever it is, it works. Same-store sales grew 14.4% in the second quarter of the year, pushing total sales up 35.2% year over year. Both figures are a continuation of long-term trends that are expected to continue for the foreseeable future.

Why should you invest in Cava?

However, it’s not just this growth that makes Cava shares such an attractive investment prospect. There are three much more specific reasons why investors should consider getting into this ticker sooner rather than later.

1. Profitable growth

One of these reasons is the simple fact that this growth is also profitable growth.

Unlike many other start-ups and young restaurant chains of its kind, Cava has been operating in the black for some time now – and increasingly so. Second quarter net income of $19.7 million tripled from $6.5 million a year earlier, continuing an established trend.

CAVA earnings (quarterly) data according to YCharts

2. Lack of debt

Even more impressive is that the company is growing without taking on debt. In fact, it is free of any long-term debt. This is the second of three reasons to get into Cava stock here and now.

It is a reason that requires an important footnote. This means that while the restaurant chain remains debt-free, it is still raising money. It simply happens through the sale of shares, which ultimately dilutes the interests of existing shareholders. The 118.3 million shares issued and outstanding (assuming full dilution) as of mid-year is well above the figure of 31.3 million a year ago.

On balance, however, this approach to fundraising works better than borrowing.

Look, debt is a slippery slope that often follows companies that spend too aggressively in the name of growth. Taking on debt wipes out the bottom line by accruing interest that must be paid quarterly without actually reducing the principal. Using the ever-increasing share price as a means of payment makes it cheaper; However, Cava Group remains fiscally flexible.

3. A successful concept

Last but not least, the third reason to buy Cava shares like there is no tomorrow is simply that the concept clearly works.

No, Mediterranean dishes are not everyone’s favorite. However, many consumers love it, and more and more consumers are getting into it. The typical Mediterranean diet is also becoming increasingly popular for health reasons, as it is high in protein and fiber, but low in the wrong types of fats. It doesn’t hurt that many consumers are also just looking for something new that goes beyond the predictable burgers, fries and Tex-Mex.

And if you doubt that this interest is strong, just a reminder that Cava’s same-store sales rose 14.4% in the second quarter, following a full-year improvement of almost 18%. That’s huge growth for any name in the restaurant industry.

Understand and embrace the evolving premise

Don’t misunderstand what a trade in Cava Group is right now. It’s still more speculative than rooted in current results.

Although profitable, Cava shares are still very expensive, priced at more than 300 times this year’s expected earnings per share of $0.42, and just under 300 times next year’s expected $0.50. The stock is also above the analysts’ consensus price target of $124.25. That leaves little mathematical room for upside potential.

However, this is one of those story stocks that will likely continue to perform well while growing to a more appropriate valuation – as the story evolves and the restaurant chain becomes more and more profitable.

To be clear, this will not prevent occasional stumbling. In fact, you can probably expect continued volatility. However, it is worth it in the long run, even if the analyst community is hesitant in the short term. It’s rare for a restaurant (and restaurant stock) to be doing so well at this point in its existence.