These two chains have far surpassed the S&P 500 this year.
Dutch Bros (BROS -0.62%) and Cava (CAVA 2.20%) are two up-and-coming chains in the restaurant arena. Both of these companies’ share prices have crushed the S&P 500 this year, which can easily draw the attention of the investment community.
Which of these two restaurant stocks is the better buy right now?
Rising up the coffee ranks
Dutch Bros operates 950 stores that sell coffee and other beverages, with speed and customer service being a top focus. The business has been expanding its footprint in remarkable fashion, and the current store count is more than double the total at the end of 2020.
Executives believe that Dutch Bros can have at least 4,000 stores open within the next 10 to 15 years — more than quadruple the current physical footprint. At this level of scale, it’s not hard to believe that revenue and earnings will be meaningfully higher, precisely what shareholders want.
As a coffeehouse chain, Dutch Bros naturally draws comparisons to the behemoth in the industry, Starbucks. The Seattle-based company has been around for five decades. And during that long stretch, it has built up a powerful brand presence across the globe, with tremendous scale thanks to its more than 40,000 locations.
A favorable outcome would be for Dutch Bros to start to develop its own economic moat. If it can achieve management’s target of opening 4,000 stores, then its brand would certainly be more widely recognized.
And it would probably obtain other advantages when procuring supplies, spending on marketing, and finding favorable real estate.
A fast-casual success story
Cava is also staring at a lengthy growth runway, according to its leadership, which believes that the business can have 1,000 locations open in the U.S. by 2032. That would translate to a 184% gain from the current 352 restaurants.
But given the monster success of the business, perhaps management could raise its long-term outlook. In the latest fiscal quarter, Cava reported an impressive 18.1% gain in same-store sales (comps), with a store-level margin of 25.6%. Net income skyrocketed 162.9%. It’s hard not to get excited about these results.
As a fast-casual restaurant chain, but one that’s focused on Mediterranean cuisine, Cava easily draws comparisons to Chipotle Mexican Grill. The Tex-Mex chain certainly has developed a strong brand in the space, which supports its proven pricing power and consistent comps growth. Moreover, with its more than 3,600 stores, Chipotle likely benefits from some scale advantages, not unlike the benefits Starbucks has developed over time.
Perhaps if Cava can execute its store expansion plan, then it could eventually have its own economic moat. And this would make it a higher-quality enterprise, especially with the possibility of rising profits.
Consider this factor
To be clear, I’m not especially excited about buying either of these companies right now. That’s because I don’t believe they have developed economic moats, since they are still small players in the vast and hypercompetitive restaurant industry. This forces me to question their staying power.
However, for investors looking for restaurant stocks that have meaningful growth potential, both Dutch Bros and Cava might belong on their watch lists. As I’ve discussed previously, they each possess qualities that some investors might find compelling.
But I think it’s also extremely important to consider valuation as well. As of this writing, shares of Dutch Bros trade at a price-to-sales ratio (P/S) of 3.8. At the same time, Cava stock trades at a P/S of 21.3.
If I had to choose between the two as the better company to add to your portfolio, I’d go with Dutch Bros based purely on valuation.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Cava Group and Dutch Bros and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
