Chipotle Mexican Grill (CMG -0.57%) is a restaurant chain specializing in burritos that now has over 3,400 locations. For its part, Mediterranean chain Cava Group (CAVA 1.27%) is much smaller, with only a little more than 300 locations. These two chains differ greatly in size and cuisine. But for investors, they have important similarities.
First, the management teams of both believe they have plenty of room for expansion. Despite its spectacular growth over the last decade, Chipotle CEO Brian Niccol hopes to more than double its number of locations. Cava’s management hopes to more than triple its footprint. Those are big growth targets for investors to salivate over.
Second, Chipotle and Cava are unusually popular with diners. To illustrate, Cava restaurants average $2.6 million in annual sales volume and Chipotle restaurants average $3 million. These are industry-leading numbers already and they’re still going up. Both enjoyed same-restaurant-sales growth in 2023.
Third, Chipotle and Cava enjoy great profit margins because sales per location are so high. Restaurant-level profit margins just consider the economics of the restaurant without corporate considerations, and Chipotle has one of the highest I know. Its restaurant-level operating margin was 26% in 2023, but Cava was right on its heels at almost 25%.
These three factors briefly encapsulate why investors love these restaurant stocks.
However, Chipotle and Cava share another similarity as well — both stocks are really expensive. And that’s why I want to point investors toward under-the-radar restaurant chain Kura Sushi USA (KRUS -4.02%). That stock has a cheaper price-to-sales (P/S) valuation — but the company is similar to Chipotle and Cava in its positive aspects.
CMG PS Ratio data by YCharts.
Kura Sushi has a lot to offer
Kura Sushi is under the radar because it’s quite small — small in the U.S., at least. By contrast, its parent company in Japan operates over 500 locations. And it has 70% of the voting power of the U.S. entity, meaning it’s controlling the U.S. entity’s future.
Kura Sushi’s management team, like the teams at Chipotle and Cava, has big plans. When it went public, it said that according to research it commissioned, there’s room for it to grow to 290 U.S. locations long term. For perspective, it only had 54 U.S. locations at the end of 2023.
That magnitude of this expansion would have big implications for Kura Sushi’s business. In 2023, its restaurants had an average sales volume of $4.3 million. Operating 290 locations at those volumes would push its annual revenue to over $1 billion — and Kura Sushi’s sales are still growing. In 2023, its same-restaurant sales were up almost 10%, so it’s safe to say that diners enjoy this upstart sushi chain.
Like Chipotle and Cava, Kura Sushi’s high sales volume supports strong profitability. At the restaurant level, the company had an operating margin of 22%. It even was enough to give it an overall net profit — even when including all corporate expenses — of $1.5 million in 2023.
In summary, Kura Sushi is profitable, could become more profitable with ongoing sales growth, and has plans to greatly expand. That could make it a long-term growth opportunity that’s just as good as Chipotle or Cava, if not better. And the valuation is more attractive for Kura Sushi, making it the better buy.
Some words of caution as well
All of this said, for those interested in Kura Sushi stock, there could be some wisdom in using dollar-cost averaging to build your position rather than buying your whole stake all at once. As a small-cap stock, it’s prone to wild volatility. It’s up nearly 50% in 2024 alone, which is a really rapid rise.
But in its few years as a public company, it has a history of frequently pulling back by 30% or more from its highs. That suggests there will likely be a pullback at some point — so building a position in pieces could help investors get a better average price.
However, investors might not want to wait too long to buy at least some Kura Sushi stock because the company is growing fast. It plans to open between 11 and 13 new locations in 2024 alone — over 20% growth. Therefore, the stock could test new highs as its business expands.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.
