Good afternoon, ladies and gentlemen, and welcome to the CAVA Q3 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, November 7, 2023. I would now like to turn the conference over to Matt Milanovich. Please go ahead.

Good afternoon, and welcome to CAVA’s Third Quarter 2023 Financial Results Conference Call. Before we begin, if you do not already have a copy, the earnings release and related 8-K furnished with the SEC are available on our website at investor.cava.com. The purpose of this conference call is to give investors further details regarding the company’s financial results as well as provide a general update on the company’s progress. You will find reconciliations of any non-GAAP financial measures discussed on today’s call to the most directly comparable financial measure calculated in accordance with GAAP, to the extent available without unreasonable efforts, in today’s earnings release and supplemental deck, each of which is posted on the company’s website. Before we begin, let me remind everyone that this call will contain forward-looking statements. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in CAVA’s filings with the SEC. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today, and except as required by law, CAVA undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. And now, I’ll turn the call over to the company’s Co-Founder and CEO, Brett Schulman.

Thanks, Matt, and welcome to the call, everyone. Our results in the third quarter of 2023 clearly demonstrates the continued strength of our business, CAVA’s broad appeal and the proven portability of our innovative Mediterranean concept. In the face of consumer headwinds, we once again delivered strong top line growth and impressive unit economics while successfully opening new restaurants across the country. While we’re taking a measured approach in this environment, we remain confident in our long-term strategy and growth targets. CAVA is creating and defining the next major cultural cuisine category with substantial white space opportunity. We have a powerful unit economic engine, and we’ve invested in building an efficient, scalable operation, putting us in a strong position to gain share and deliver on our extraordinary potential regardless of economic conditions. In the third quarter of 2023, we delivered a 49.5% increase in CAVA revenue, 14.1% CAVA same-restaurant sales growth, including a 7.6% increase in traffic; 11 net new restaurants, ending the quarter with 290 restaurants, a 35.5% increase year-over-year; adjusted EBITDA of $19.8 million, a $15 million increase over the third quarter of 2022; and net income of $6.8 million. Our strong Q3 results and ability to capitalize on the opportunities ahead are grounded in our three strategic pillars. First, we are solidifying our category-defining Mediterranean brand. We opened 11 net new CAVA restaurants during the quarter with continued expansion across Alabama, Arizona, California, Florida, Georgia, the Carolinas and Texas. In the fourth quarter so far, we’ve opened 12 additional restaurants, putting us on track for 70 to 73 net new CAVA restaurant openings in 2023. With our last Middle East restaurant conversion completed, we are now operating under a single powerful CAVA brand. This important milestone has energized the team and we’re seeing that in our results.…

Thanks, Brett, and good afternoon, everyone. CAVA revenue in the third quarter of 2023 grew 49.5% year-over-year to $173.8 million. Same-restaurant sales increased 14.1% driven by traffic growth of 7.6%. I would like to take a minute to clarify our same-restaurant sales calculation. Both NROs and conversions entered the same-restaurant sales base when they have been opened as a CAVA restaurant for at least 365 days, clarifying that the strong growth when a location converts from Zoe’s to CAVA is not included in same-restaurant sales. We noted broad-based same-restaurant sales strengths across vintages, regions in both suburban and urban locations. We opened 11 net new CAVA restaurants this quarter, bringing our total CAVA restaurant count to 290. We are off to a strong start in Q4 with 12 new restaurants already opened, giving us confidence to raise our new unit guidance range to 70 to 73 for the year. New restaurant openings are outperforming the model from the top line and restaurant-level margin standpoint. In addition, we continue to prove our portability with an overall AUV above $2.6 million and all geographies over $2.3 million. CAVA restaurant-level profit in the third quarter was $43.6 million or 25.1% of revenue versus $25.2 million or 21.7% of revenue in the prior year, representing a 72.8% increase. The margin expansion was largely a result of improved food, beverage and packaging costs and sales leverage on labor and occupancy. Our third quarter profitability demonstrates the power of our business model. Given our current stage of growth and our commitment to continued investments in our restaurants, we do not expect to maintain this level of profit margin in the near term. CAVA’s food, beverage and packaging costs were 29.4% of revenue, lower than third quarter of 2022 by 190 basis points, driven by lower input…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from Andy Barish from Jefferies. Please go ahead.

Yes. Hey, guys, great results. Just wanted to clarify, I’m doing the math, right, on what you’ve reported year-to-date. It implies the fourth quarter same-store sales are kind of flattish to slightly positive. Am I missing something there? Or can you clarify a little bit on sort of how that rolls up to the 15% to 16% for the year?

Yes. Hey, Andy, it’s Tricia. Good to hear from you. So the implied guidance is a little positive, up to about 4.7% or so. And what that reflects is the strong comp in the fourth quarter of the prior year at 15% and taking, to a lesser extent, into play the macroeconomic environment and the impact that it may have on the consumer.

Okay, got it. Yes, I appreciate some of the early thoughts on ‘24. And as we all look at the calendar turning in the not-too-distant future, are you still thinking that comps can be positive, even lapping some of those really big numbers in the first half of the year?

Yes. So we tend to look at things on a 2-year stack. And so when we had a 28% comp in the first quarter of last year, there was a benefit of about 10 points related to weather and Omicron, and that is going to make Q1 of 2024 a bit challenging for us. So I wouldn’t expect significant positive comps as we go into Q1. But certainly, our long-term approach and thinking about low to mid-single digits on a same-restaurant sales basis annually seems to make sense to us.

Okay, much appreciated. Thanks for the color there.

Thank you. The next question comes from John Ivankoe from JPMorgan. Please go ahead.

Hi, thank you. Obviously, good results. But I was wondering if you thought you’ve actually left maybe some customer money on the table in the third quarter. And I asked this in the context of stores that have very clearly been very busy. In other words, do you think that you’ve really had the throughput in place to properly serve all the customers that have walked into the stores and wanted to purchase CAVA? And secondly, there’s been some feedback around digital pickup times that haven’t been exactly accurate, at least relative to customer expectations. I wonder if that’s been kind of a specific experience, if that’s been a broader experience and if you do have some tightening opportunities, perhaps from an operational execution perspective, to post even better results than what you already have been. Thank you.

Hey, John, it’s Brett. Thanks for the questions. First, I want to be clear, we’re building this business for the long term and setting our team members up for success to deliver great guest experiences and working, first and foremost, on fundamentals of operations and hospitality. Certainly, we always believe there are opportunities to optimize our operations and continue to look at it in all facets. As it relates to digital order specifically, we do track digital order accuracy rates as well as our Yext score. So this is how customers are rating us and judging us. And we’ve been over 4 out of a 5-point scale for over the last 52 weeks, and we’ve actually increased that in the last couple of periods, almost 4.5. So we’ve seen writ large our guests be very happy and even increasingly happy with our performance, but that’s not to say that there aren’t opportunities to continue to drive that score higher as well as improve the speed in which we operate over time over the long haul, but we’re certainly mindful of not overheating the engine certainly from an operation standpoint.

And obviously, introducing steak, I mean, does that mean one protein necessarily has to come off as part of the stage gate process? I mean it’s always an interesting idea of introducing new products that provide more variety and more use occasions to the customer. But just talk about how you balance the ability of maintaining that consistent execution as you do add additional SKUs and perhaps complexity to the system.

Yes. Great question, John. And I talk about our 38 ingredients with over 17 billion combinations, and we’re trying to be really disciplined about not introducing too much menu creep and complexity into the system. So back almost a year ago, we removed beef meatballs from the menu. That opened up a new slot within our mains category. So steak would actually be taking a spot that used to exist right now. We also have that rotational slot where spicy falafel currently exists, and we’ll be bringing back our white sweet potato over the winter, which was a fan favorite that we’re going to rotate back through. But steak would actually be filling that former beef meatball slot, reintroducing a beef item that’s been highly requested on our menu.

Perfect. Thank you.

Thank you. The next question comes from David Tarantino from Baird. Please go ahead.

Hi, good afternoon and congrats on great results here. So I had a question, you mentioned a couple of times that you wouldn’t expect the restaurant margin performance you’ve been delivering recently to be the new baseline. I was just wondering if you could maybe elaborate on what you think the right underlying baseline should be as we think about 2024 as a starting point, just to make sure we’re on the same page.

Yes. Thanks, David. So we mentioned the investments that we’re making in wages of about 100 to 120 basis points. And that certainly should be something that’s reflective of continued reinvestment in the business to make sure that we’re well positioned for our continued growth over the long term. So it’s something that we’ve been very focused on historically, always firmly focused on our employees and how important they are to us. We view them as assets, not as expenses, and we want to make sure that we’re always investing in them. Remember, back in 2016, we went to a $13 starting wage, and certainly, our commitment to our employees will continue. But as you think about our restaurant-level margins, what Q2 and Q3 demonstrate is the power of the model and what CAVA can deliver over the long term, but we’ll make those investments we’ve already done and continue to evaluate the opportunity for additional investments in the near term so that we ensure that we’re well positioned for what we can deliver over the long term. So overall, there’s at least 100 to 120 basis points that we’ll invest in, and we have plans to continue to invest in ‘24 as well that will bring restaurant-level margins a bit down a bit more. One other thing, David, that I will add to is in 2023, there was a lot of value and benefit in very high same-restaurant sales as well as a strong PPA. And that strong PPA was the result of premium attachments and attachments in general, things like our pita chips that are increasingly more popular or our honey harissa chicken. And all of that drives leverage throughout the P&L. And given the uncertain environment that we’re in, we’re not sure if that will continue into 2024, but we’ll certainly be ready if it does.

Makes sense. Thank you.

Thank you. The next question comes from Brian Harbour from Morgan Stanley. Please go ahead.

Yes, thanks. Good evening, guys. Tricia, I had a question, too, just kind of about that labor line. So is that the net impact that you’d expect, i.e., you think labor costs as a percent of sales will be up 100 to 120? And I think also just broadly, is there a little bit of catch-up being played here? I know that, that’s, I think, more of an increase than some of your peers are seeing. And also, does that account for maybe taking wages up in California next year at this point?

Hey, Brian, thanks for that. And so we don’t view this as a catch-up. It is really an investment in our team members and, going back to what I said earlier, really demonstrates our commitment to them and how we viewed how we run CAVA historically and as we go into the future. And so it’s wages, it’s other benefits and other things. So it’s a minimum 100 to 120. There could be other things we do in 2024 as well. And as it relates to California, we’re not making any changes in price necessarily yet. The wages that we’re reflecting in California will have about a 30 basis point impact overall on restaurant-level margins when they do increase to $20 in April, and that piece should be factored in as you think about ‘24 as well.

Okay. And just on new unit openings, that’s obviously come in quite strong this year. So maybe that just alludes to some of the pipeline building that Brett mentioned. But what’s kind of enabling you to run ahead of that target where I think some peers have still seen challenges?

Yes. Our real estate and design construction teams have done a good job in anticipating the challenges that might lie ahead and really built-in buffers into our time lines as well as into our pipeline. So we raised our buffer from 20% to 30% earlier in the year, creating a robust pipeline that we could leverage, and we’ve been successful in doing so. And so we see the opportunity to open more restaurants this year than we had originally planned.

Thanks.

Thank you. The next question comes from Chris O’Cull from Stifel. Please go ahead. Christopher O’Cull: Thanks. Good afternoon and congrats on a great quarter. The consumer’s willingness to trade up to more premium items has been a factor you guys have alluded to for a few quarters now. Tricia, can you dig into, on that point, just a little bit more? And help us understand the contribution to the comp you think that, that has had maybe this quarter and whether you see that continuing to benefit you over the next several quarters.

Yes. So I appreciate the follow-up question, Chris. So as we look at our incidents in the premium attachments, drinks and ships are items that we’ve seen a significant increase year-over-year. So chips, in particular, are up a couple of points. As you look at the third quarter last year and third quarter this year. And then honey harissa chicken, as I mentioned, is also up a few points as well. As it relates to comps, it has a modest impact on overall same-restaurant sales. Really, the strength in our same-restaurant sales goes back to the traffic that we experienced, so a nearly 8% growth in traffic. We saw that across all vintages, across all geographies, in suburban and urban. And really just demonstrates how our food and culinary and hospitality is resonating across the country as we create the next big cultural cuisine category. Christopher O’Cull: Okay. That’s helpful. And then, Brett, the comp growth has been running ahead of expectations, which I’m sure has made it difficult for the stores to schedule the right amount of hours, which has led to this margin leverage that you’ve seen in the last couple of quarters. I’m just trying to understand, how do you think about addressing that potential? I guess it could be considered an issue in terms of labor scheduling. But how do you get ahead of that and make sure that you have the right number of hours for the right daypart in the right time?

Yes. The team has done a lot of work on this, Chris. And what they found is that they have the right complement of hours. It’s just allocating those hours a bit more effectively and efficiently to align with some of the traffic patterns. So we’ve got a number of different labor deployment tests going on in various markets for the various different daypart mixes across the fleet and revenue bands to ensure that we’re setting our team up for the best success and that we can then lean into driving potential additional throughput opportunities down the road. But we want to be focused on what is going to be the right staffing complement at the right times of day and the right prep load balancing at the right time of day to make sure that our team members are front-footed before we open up additional firehouses of revenue on them. I think it’s critical to make sure we’ve got our operators positioned in the best place as we drive revenue going forward. Christopher O’Cull: Okay great. Thanks, guys.

Thank you. The next question comes from Jon Tower from Citi. Please go ahead.

Great. Thanks. Just a couple of clarifications and then a question. First, on the comments about the fourth quarter guidance, the implied comp. Are you seeing a slowdown of that magnitude quarter-to-date?

Well, as we’ve stated prior, we are not going to give inter-quarter or intra-quarter guidance as it relates to same-restaurant sales. And I’ll just reinforce what we said earlier, we had a very strong Q4 of 2022 at a 15% comp. And so factoring that in, as well as the uncertainty in the macroeconomic environment, we feel comfortable with the guidance that we’ve outlined today.

Got it. Okay. And then just on the steak itself, is that going to be a permanent menu item or is it slotted as an LTO?

We are still looking at it through the stage gate process to make a final determination, and we’ll have more on that in future earnings calls.

Okay. And then just last one on the question piece. You’re speaking quite a bit to the idea that the environment, the macro environment, there’s a lot of uncertainty. And I’m just trying to think about how CAVA breaks through the noise in an environment where consumers are being a little bit more discerning on where they spend, your brand awareness is pretty low relative to the competitive set and we’re already seeing value messaging starting to step up across the industry. So what tools does the team have in place to kind of draw in new customers next year as kind of the noise across the industry around value really steps up?

Yes, Jon, it’s Brett. Thanks for the question. I think you called it, right? We’ve got fairly low brand awareness compared to some of our larger peers, yet we’re putting up great results. We’re seeing great resiliency from our consumer. We’re seeing people gravitate to the brand. So we feel like there’s a lot of upside for us in the coming months and years as Mediterranean becomes a more national cuisine and CAVA becomes a more national brand from a brand awareness standpoint. When you think about the tools we have, our social team does a phenomenal job. It’s amazing, the virality and the awareness you can get on a channel like TikTok these days and get millions of views and really have our brand awareness have a network effect around markets as well as opening new restaurants with our community days. And the earned media we get in these markets, we found our marketing spend to be incredibly efficient in driving brand awareness increases in markets. So you look at some of the markets we’ve opened a year or 2 ago, the brand awareness has already increased from 20% to 40%. So again, we’re in our infancy and we’re in the early stages of this. And then when it comes to the value perception, which is why I think our traffic has been resilient in the face of some of these macroeconomic headwinds is the differentiated nature of our cuisine, the uniqueness of our cuisine, and the fit of our cuisine to a modern consumer were taste and health unite, right? You think about trying to recreate a CAVA meal at home or at the grocery store for a similar price or going to a peer and getting a similar type of meal that is satisfying, flavorful and helpful for you at a similar price. So we have been leaning into our value proposition. Tricia talked about the price increases or the lack thereof that we’ve taken compared to many peers, working on behalf of our guests, trying to drive a great value proposition for them when they’re feeling the pressures of inflation from other parts of their life, and we think that’s what’s kind of translated to the results this quarter and what we’re leaning into next year to continue to not only be resilient but grow market share in the face of those macroeconomic concerns.

And then just the last one for me, I know you spoke about the idea of wage investments starting in this fourth quarter, carrying over into next year, are there any other investments we should think about potentially getting the P&L in ‘24?

Yes. We’re continuing to evaluate other opportunities for investments on the labor line. So that is another area that we’re testing different concepts and different ideas that could evolve into something in ‘24. And as those get more solidified, we’ll give more color on that on the next call. But then for the rest of the P&L from a restaurant standpoint, we’re not anticipating significant investments any of the other line items.

Great. Thanks for the time.

Thank you. The next question comes from Matt Curtis from William Blair. Please go ahead.

Yes, thanks. Good evening. I just wanted to know what your outlook is for commodity inflation in the fourth quarter as well as maybe just a preliminary thoughts on what commodity inflation might look like in 2024.

Yes. So thanks, Matt. So 2023 has benefited from some favorable input pricing, particularly as it relates to chicken. That will continue into fourth quarter. Nothing significantly different than what we’ve already experienced in Q3, but as we go into 2024, we’re anticipating low to mid-single-digit potential commodity inflation.

Okay. Great. And then just separately, I was wondering if you could tell us a little bit more about how the class of 2023 openings has been ramping both in terms of sales and profitability to this point.

We’re very pleased with our 2023 class. And they have opened above our expectations, both on the sales side as well as the restaurant-level margin perspective. So really pleased with that cohort and what they’ve been able to deliver and much like the other vintages prior to that. Where we do think, as we go into 2024, is being thoughtful in the new classes themselves and wanting to think about them from an 80% productivity standpoint. Nothing is concerning us in what we’re seeing, but this class has significantly outperformed this year. I just want to be thoughtful on how we think about classes in future years.

Okay. I understood. Thanks for that.

Thank you. The next question comes from Aisling Grueninger from Piper Sandler. Please go ahead.

Hi. This is Aisling on for Brian. Congrats on the impressive results today. My question is on the catering opportunity. I believe you’re testing in a traditional restaurant format. I was wondering if you could talk about what you’re seeing in the test. And if it’s successful, is this something you’d imagine incorporating into all the stores? Or is it something where you’d expect this to influence the design or lay out of new store builds? Thanks.

Yes. This is Brett. Thanks for the question. We continue to progress on our catering test, and we are now up to 8, what we call, CAVA hybrid kitchens. So these are new units we’ve built with an expanded back of house for centralized catering production. In addition, to your point, we are testing in a traditional CAVA restaurant, and we’re growing that to a few other units as we expand that format test because we know that there aren’t all units that really support catering. Because the AUVs are so significant and the production capacity is so limited that we don’t want catering to come at the detriment of the other channels. So we’re looking at other formats or other locations around those locations to supplement production to be able to have catering offered across the country. So we’re performing these different format tests over the next year or so to understand how we orient this production successfully to support what we think is a great opportunity to launch catering nationally across the Board. Just an example, we catered almost every single Major League Baseball team this summer. We catered for the Texas Rangers during their World Series run. We catered the Lakers when they were in the playoffs last spring. So not only office workers or schools but athletes, colleges, professional, we see our cuisine being a great fit for our catering channel. We just want to be thoughtful about how we build out the production capabilities to deliver a great guest experience when we’re ready to launch it nationally.

Great. Thanks for the color.

Thank you. The next question comes from Alton Stump from Loop Capital. Please go ahead.

Great. Thanks so much for taking my questions. Just wanted to go back to the input cost front. Obviously, after, over the last 18 months, seeing 40-year-high inflation, things seemed to be settling down. But as I just kind of think about input costs versus pricing heading into next year, do you think that particular bucket is a positive or a negative to your store-level margin next year versus this year?

Yes. So we mentioned on the call that we anticipate raising pricing in January in the 2.5% to 3% range, and the input cost on the commodity side is in the low to mid-single digits. And then as we also discussed, we’ve got some investments on the labor side that we have made and then are also exploring. So I think if you take all of that into consideration, that would give you a good view into what the impacts are going to be overall from a restaurant-level margin perspective.

Got it. Very helpful. And then I guess one quick follow-up and I’ll hop back in the queue. But just, I mean, on the pricing front, actually just touch on what your plans are for earlier next year, how competitive an environment do you think it will be? You guys are actually tracking a much more positive traffic trends than almost anyone right now in the space. You’ve got probably more room than most. But just kind of how you feel about the pricing versus your competition moving into next year.

Yes. So we’re very mindful of pricing and where we sit versus the competition. While Brett touched on how it’s really difficult to create the CAVA experience at home, we want to make sure that we’re accessible to as many guests as we possibly can be. So as we think about pricing, we’re very thoughtful about that and feel we’re very well positioned against our competitors to create that accessibility but also perform well for the business overall.

Got it. Great. Thanks so much. Congrats on the quarter.

Thank you. As there are no further questions, I will turn the call back over to Brett Schulman, CEO and Co-Founder, for closing comments.

Thanks, everyone, for joining the call today. I want to thank our teams once again for delivering an exceptional third quarter, which provides further evidence of the broad appeal of our Mediterranean concept. We have a significant white space opportunity in front of us. As we define and create the next large-scale cultural cuisine category fueled by a powerful unit economic engine, successful new restaurant openings across the country and strategic investments in people and the infrastructure we need to scale, we are extending our clear leadership position. We’re keeping a close eye on macroeconomic conditions, but our focus is on building a durable brand that can deliver value over the long term, and we couldn’t be more excited about what the future holds. Thanks again for joining us. I look forward to speaking with you next quarter. And in the meantime, we wish you a happy holiday season.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you to please disconnect your lines.