Good morning, ladies and gentlemen, and welcome to the CAVA Q4 2023 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, February 27, 2024. I would now like to turn the conference over to Matt Milanovich, SVP of Finance. Please go ahead.

Good morning, and welcome to CAVA’s fourth quarter and full-year 2023 financial results conference call. Before we begin, I want to thank you for joining us today on late notice. Yesterday, a media outlet reached an embargo agreement and released a story about our financial results in error [ph], prompting us to issue our earnings release and host this call ahead of schedule. If you do not already have a copy of the earnings release and related 8-K furnished with the SEC, they’re available on our website at investor.cava.com, which we encourage you to review. The purpose of this conference call is to give investors further details regarding the company’s financial results, as well as a general update on the company’s progress. You will find reconciliations of any non-GAAP financial measure 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 a forward-looking statement. 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. In 2023, we demonstrated the power of our category-defining brand and the significant whitespace opportunity ahead of us. We opened 72 net new restaurants during the year, growing our footprint by more than 30%. Traffic in our existing restaurants continued to climb. And following a successful IPO, we generated 3 consecutive quarters of positive net income. As we create the next large-scale cultural cuisine category, our extraordinary potential is clear. We fulfill consumers’ growing desire for bold, unique flavors with no compromise between taste and health. Our Mediterranean concept has broad appeal across genders, generations, and income levels and proven portability from coast to coast in cities and suburbs. We now have a presence in 24 states in the District of Columbia and continue to target annual unit growth of 15% or more with a long-term goal of 1,000 restaurants by 2032. We’ve built a strong foundation to support that growth, and our powerful unit economic engine continues to drive us forward. Even with continued macroeconomic and geopolitical uncertainty, our value proposition is resonating with consumers. The investments we make in our team members and our guests support that value proposition. We are working on behalf of our team members by investing in attractive wages and benefits, enhanced training, and career development opportunities. We are working on behalf of our guests by mitigating price increases and by not taking outsized pricing to offset unplanned costs related to the impact of new legislation, like AB 1228 in California, which includes aspects of its predecessor bill known as the FAST Act. We see the impact of these investments come to life every day. I was on a plane the other day, heading home from visiting our team in LA, when one of the flight…

Thanks, Brett, and good morning, everyone. CAVA revenue in the fourth quarter of 2023 grew 52.5% year-over-year to $175.5 million. Same restaurant sales increased 11.4%, driven by traffic growth of 6.2%. Fiscal 2023 had a 53rd week, which we excluded from our same restaurant sales calculation. We noted broad-based same restaurant sales strength across vintages, regions, and both suburban and urban locations. We opened 19 net new CAVA restaurants in the fourth quarter, bringing our total CAVA restaurant count to 309. We continue to be pleased with the top-line and margin performance of new restaurant openings. In addition, our proven portability is reflected in our overall AUV above $2.6 million with all geographies $2.3 million or more. CAVA restaurant-level profit in the fourth quarter was $39.3 million, or 22.4% of revenue versus $23 million, or 20% of revenue in the prior year, representing a 70.7% increase. The margin expansion was largely a result of improved food, beverage, and packaging costs, and sales leverage, including the impact of the 53rd week, partially offset by incremental wage investments. CAVA’s food, beverage, and packaging costs were 28.8% of revenues, lower than the fourth quarter of 2022 by 210 basis points, driven by lower input costs and higher incidence of premium menu items driving favorable product mix. CAVA labor and related costs were 27.8%, up 50 basis points from the fourth quarter of 2022. The increase reflects investments in our team member wages that we discussed on the third quarter earnings call, partially offset by leverage from increased sales compared to the prior year. CAVA occupancy and related expenses were 8.3% of revenue, an improvement of 100 basis points from the fourth quarter 2022 due to increased sales leverage. CAVA other operating expenses were 12.7% of revenue, an increase of 20 basis points from…

Thank you. [Operator instructions] Our first question comes from the line of Brian Harbour at Morgan Stanley. Please go ahead. Your line is open.

Yeah. Thank you. Good morning, guys. Maybe as you think about that same-store sales range for this year, obviously, the low-end of that is just kind of your pricing plan. Are you still seeing – do you still expect kind of more premium attached? What do you see as kind of mixed drivers of that this year? And then, how much traffic perhaps would you expect within that range that you’ve talked about?

Hey, Brian. Good morning. So our 3% to 5% guide really reflects 2 years same-restaurant stack in the low-20s for the full year with higher in the first part of the year than it is in the back part of the year, because of those Q1 impacts from favorable weather that we had talked about previously. The other thing that it considers is the IPO halo in Q2, and to a lesser extent, in Q3. It does reflect the 3% price that you called out. And traffic and mix is the remainder. But the way we’re looking at it is if PPA continues to expand, you’d likely see the same restaurant sales guide, the actual results to be closer to the high-end of the range.

Okay. Thank you.

Thank you. Our next question comes from the line of Jon Tower at Citigroup. Please go ahead. Your line is open.

Great. Thanks. I appreciate you taking the question. I was curious, Brett, you had mentioned earlier two things that I was hoping you could expand upon. First, you talked about new design for some of the stores and expanding space for in-store occasions. I’m just curious if you could dig into whether or not you feel like new store prototypes will require a bigger footprint in general versus what you’ve got today for the store base. And then the second is if you could maybe provide a little bit more color on where you are in the connected kitchen initiative, how much more you see with respect to investment over the next 12 months, and kind of specifically where you plan on within the store kind of going after?

Yeah. Thanks, Jon. Thanks for the question. Regards to the footprint, we don’t see any change in our footprint. It’s really enhancing and warming the aesthetic in our physical space to really accommodate and invite more in-restaurant occasions. 64% of our guests opt to come in engage with us in our physical channel. We have 36% that engage in our digital channels. We have great digital channels. We have 31 pick up by car – digital pickup lanes, as well as all of our pick-up-off-the-shelf opportunities, and we have great physical channels. We don’t think it’s an either/or, we think it’s an and, and so we want to really take advantage of that opportunity to drive additional physical locations, along with those digital occasions. In regards to the connected kitchen initiative, this is the beginning of a multiyear journey where we see a tremendous opportunity to improve productivity to drive greater operational effectiveness and efficiency by taking a lot of complexity off the team member’s plate. So it’s really taking to another level of sophistication, things like predictive scheduling, predictive prep, predictive cook batching through the use of data and AI models. And any expense or CapEx investment is reflected in our longer-term guidance. But, again, this is a multiyear initiative that we’re excited about and we see the opportunity again to drive greater productivity and make it easier for our team to run our CAVA restaurants and deliver that great Mediterranean hospitality and food.

Thank you.

Thank you. Our next question comes from the line of Brian Mullan at Piper Sandler. Please go ahead. Your line is open.

Okay. Thank you. Just a question on venue innovation. Brett, you shared in the prepared remarks, you’re going to roll steak out across the system, I think, in the second half of this year, which is exciting. Can you just talk about what you saw in the tests? What caused you to go ahead and take this next step for the full launch and just maybe talk about the benefits to the business from a consumer perspective and then maybe an economic perspective? Thank you.

Yeah, we’re excited to be on track to launch this in the second half of the year. What we’re seeing in the tests is the consumer receptivity, as well as the operational effectiveness that we were looking to validate. And so that’s the stage gate we’re in with the multi-market tests in Dallas and Boston, and we’ve seen results have been meeting our expectations in both markets. And if you remember, we used to have grilled meatballs on our menu that we removed back in January, and so a beef item is definitely a perceived gap in our menu that we think is an opportunity to drive incremental occasions and frequency that doesn’t currently exist on the menu. So we’re excited to launch that in the second half of the year.

And as it relates to the economics, the test is designed to be margin dollar equivalent, and so we’re continuing to evaluate the results of those tests, and we’ll have updates on our next call and how that might impact our guidance. At this point, the guidance does not reflect any impact as a result of the steak test, so we’ll continue to give you updates as we move forward.

Okay. Thank you.

Thank you. Our next question comes from the line of Andy Barish at Jefferies. Please go ahead. Your line is open.

Hey, guys, good morning. I guess, it’s kind of a connected question, just the southeast and southwest markets are your lower volume markets coming out of the Zoes conversions. Any specific kind of plans in that region of the country? Or does it really tie into kind of the real estate pipeline and just continuing to build out and drive awareness? And I’ll have a follow-up, I guess, shortly.

Hi, Andy, thanks for the question. The southeast and the southwest are at $2.3 million AUVs and $2.4 million, respectively. And really those AUVs reflect a relatively young fleet of restaurants in those markets, and that’s what’s driving the AUVs. So we don’t see a need to do anything to necessarily impact those markets any differently, but just continue to execute on incredible hospitality and amazing culinary and innovation. And you should see those results continue to increase like the rest of the fleet.

And then anything on the real estate pipeline you can share with us? Obviously, a good start with 11 so far quarter-to-date just on the state by quarter or the balance by type of stores, new markets, developing markets, et cetera.

Yeah. So our real estate pipeline is very robust. The team has been executing really well on our strategy, so we have a very balanced pipeline, meaning about 10% in established markets and then another 10% or 20% in those emerging markets – the greenfield markets, which are those brand-new markets like Chicago where we’ll be opening up. And the rest of it’s in our growth and emerging markets. And so, we’re executing against that, feel really good about it, built in the appropriate buffers in the timeline, and we’re envisioning a fairly even spread of restaurant openings throughout the year.

Great. Thank you very much.

Thank you. Our next question comes from the line of David Tarantino at Baird. Please go ahead. Your line is open.

Hi, good morning and congratulations on a great 2023. My question, Tricia, a clarification question on the Q4 revenue number and just looking at relative to how we and others model. The upside on the revenue was not quite as high as the upside on the comps, and I was wondering if there’s anything to call out related to something outside the comp line that might have influenced that outcome. And maybe, in particular, as a follow-up, if you could comment specifically on what you’re seeing in the most recent class of openings in terms of average unit volumes, that’d be great. Thanks.

David, thanks for that. Certainly. I’ll start with your last part first. Our new restaurant openings have been exceeding our expectations, both on the AUV side, as well as on the restaurant-level margin side. So really pleased with, again, the real estate process and the pipeline and what those new restaurants have been delivering and continue to deliver throughout the year. So when we think about the models themselves and how you might have been looking at it, it looks like the impact of average weekly sales doesn’t properly reflect all of the seasonality associated with our business. So the fourth quarter is our seasonally softest quarter with the lowest average weekly sales of any quarter for us at CAVA. And at the same time, I think there could have been a little bit of an overestimation of the impact of the 53rd week, keeping in mind that we had holiday impacts on top of the seasonality component to it.

Great. Thank you very much.

Thank you. Our next question comes from the line of Chris O’Cull at Stifel. Please go ahead. Your line is open. Chris O’Cull: Thanks, and congrats on an excellent year. Brett, what are the key performance goals for the store ops team as you enter into 2024? And I was hoping you could describe maybe the KPIs that will measure that progress and maybe where those measures are today and where you want them to be at the end of the year?

Yeah. Hey, Chris, thanks for the question. From an operations metrics, we have our proprietary ops scorecard, where we have seven key operating and financial metrics that we track, and that’s everything from – that incorporates customer experience scores to management of COGS and labor, ensuring accuracy, consistent portions, as well as food safety adherence and accountability. So we are looking at throughput opportunities as well. We think that they exist, but we want to make sure we’re not pushing on the gas pedal too far too fast, and so we are testing some different labor deployments to take advantage of that opportunity as the year progresses. Chris O’Cull: Great. Thanks.

Thank you. Our next question comes from the line of Sharon Zackfia at William Blair. Please go ahead. Your line is open.

Hi. Good morning. A question on development, as you’ve accelerated greenfield throughout 2023, have you encountered any surprises, kind of positive or negative? How has that kind of pipelines and manifesting, obviously, you raised the 2024 outlook? So are you seeing more predictability and timing of delivery of sites and ability to get them up and running as you would have anticipated maybe pre-pandemic? I know there’s been a lot of moving parts in getting units up and running the last few years.

Hey, Sharon. Yes, certainly lots of moving parts. Us, like many others in the space, have seen development pipeline timelines expand, so increasing a month or two over the past few years. Nothing’s really surprised us. We were anticipating there would be challenges built that into our pipeline so that it would be appropriately reflective of what we could deliver, and we’re continuing to just evaluate where the opportunities are. I mean, we’re in 24 states today, but still a lot of whitespace across the country. So the real estate teams are out, scoping out new markets where there’s lots of opportunity, and there are many of them. So if there was ever a situation where a market may not be materializing the way we’d like, we feel like we’ve got the appropriate mindset to develop the patience and find the right sites that are going to deliver the right returns and drive that overall value.

Can I ask a follow-up? Have you changed the way you build brand awareness as you’re doing greenfield? Or is it really similar to kind of what the strategy has been over the last 5-or-so years?

Hey, Sharon. It’s Brett. We have updated our local store marketing campaign to drive increased local press awareness and elevated our community day. I’m excited that our recent opening in Hollywood, California, had a record-setting community day of raising donations for our philanthropic partner in the market. So, I think, the team has done some nice tactical improvements to drive greater awareness around openings at a local level. So we have done some things around that. And as we open up Chicago, given the size and scale of the market, we will be doing a bit more of upper-funnel type campaign to announce our arrival in the market.

Okay. Great. Looking forward to Chicago. Thank you.

Thanks.

Thank you. Our next question comes from the line of Andrew Charles at TD Cowen. Please go ahead. Your line is open.

Great. Thanks. I wanted to ask about the digital pickup lanes. How is that performing versus the original expectations for about 10% to 15% higher volumes? And what I’m really trying to understand is if you’re approaching the point where it makes sense to either ramp the mix of new stores above the 50% run rate or test retrofits or relocations, just given the favorable ROIC you’re likely observing.

Hey, Andrew. So we’ve got 31 pickup lanes today, and the pickup lanes do continue to look better from an overall AUV perspective and slightly higher from a restaurant-level margin perspective. What we’re thinking about and how we’re executing is making sure we’re being thoughtful around the choices we’re making on pickup lanes and don’t get pressured into chasing a number. And so, while you mentioned a 50% target itself, we’re likely going to be over one-third, but less than 50%as we think about pickup lanes going forward. Our focus is driving the best cash-on-cash return that we possibly can and making sure that we’re exceeding those 35% targets for cash-on-cash return and really delivering a lot of value. So what we don’t want to do is feel a lot of pressure to really go into a site and compete with a Raising Cane’s or a Chick-fil-A on something and that we really can’t underwrite in the same way and get us in a spot that doesn’t drive those returns in the attempt to meet a goal to have as many pickup lanes as possible. Great news is, we perform really well, whether we’re in line, freestanding, or have a pickup lane, and so we’re just making sure we can optimize those returns in the best way possible.

That makes sense. And then, Tricia, last quarter, you flagged to not expect materially positive comps for 1Q 2024, given the tough comparison. In other words, 2 months into the year with unfavorable weather for the industry in January that’s improved in February, are there any other PSAs that you call out for modeling 1Q comps?

Thanks for the question, Andrew. As you all know, we don’t give intra-quarter guidance, so we’re not going to speak to what we’re seeing in Q1 itself. But I will say that nothing’s changed our approach to our guide of 3% to 5% as we thought about it last year and into this year.

Appreciate it. Thanks.

Thank you. And our next question comes from the line of Nick Setyan at Wedbush Securities. Please go ahead. Your line is open.

Thanks. I just wanted to hone in on margins a bit, just what you guys expect in terms of food cost inflation in 2024. And with 3% pricing, particularly with the upside in Q4, why we couldn’t see flat to down COGS in 2024.

Nick, thanks for the question. When we think about food cost inflation, we’re thinking low- to mid-single-digits, but there are some increases, particularly around chicken and olives and olive oil. So our chicken, we had great pricing last year related to chicken. And as we go into next year, there’ll be some increase in that area. And then also olives and olive oil were impacted by an unseasonably warm climate or temperatures overseas in Europe, where we secure our products that have some impact overall. So we wanted to take that into account as we’re thinking about COGS and what that will look like. The other piece around COGS is 2023, and we’ve talked about this before, but really benefited from very high same restaurant sales growth that was creating efficiencies in COGS from a waste perspective and other items. And so that will drive into the impact on COGS as you go into 2024 itself.

And then just in terms of the unit growth outlook, would you mind telling us what Q1’s number of units might look like?

From a Q1 perspective, we’ve already opened 11. Keep in mind, Q1 has 16 weeks, and I’m anticipating that openings will be fairly even throughout the year.

Thank you.

Thank you. Our next question comes from the line of Brian Vaccaro at Raymond James. Please go ahead. Your line is open.

Hi. Thanks. Just following up on Nick’s question on store margins. Could you help us parse out the incremental labor versus other investments that are embedded within that guidance? And then I had a quick follow-up.

Yes. So as we talked about on the third quarter call, we did invest in incremental labor in Q4 of 2023, about 120 basis points, I mean that will be offset with just a natural leverage and labor over time as AUVs grow. But the other thing to think about is other investments that could be related to our pillar around running great restaurants every day and every shift, so think about things like increased managerial resources at higher volume restaurants that would drive increased productivity and further pipeline depth, but at the same time, creating productivity over the long-term. So there’ll be investments that we’re making that we’ve shared, and then that will be offset by leverage overall as we continue to scale and grow the business and the restaurant.

And, I think, you mentioned opportunities to improve throughput in certain markets as well. Is there a thought that you’ll need to add hourly hours per store in a significant number of stores?

Hey, Brian. It’s Brett. No, we think there’s opportunity to be more efficient with our labor deployments and recalibrate how we deploy labor, along with some of the aspects I talked about in relation to the connected kitchen initiative that will drive even greater productivity through our data.

All right. Great. And then my real question kind of is just, can you provide some more color on how the converted Zoes’ units are performing? Perhaps, you could touch on the year-on-year comp growth for the class of the 2021 conversions or some color on where AUVs are currently running for the class of 2022 conversions. Thank you.

Yeah. So we’re pleased with our Zoes conversions, and we look at those like new restaurant openings. So we evaluate those with the others. And as I mentioned, our new restaurant openings are exceeding our expectations and really excited about those conversions, as well as our organic ground-up NROs.

Thank you. Our next question comes from the line of Rahul Kro at JPMorgan. Please go ahead. Your line is open.

Good morning, guys. Thanks for taking my question. Can you elaborate a little more on the 3.0 design, Brett? Are you guys like trying to lower the cost of the box? Or are you like actually scaling up and increasing the cost while you’re trying to increase the movement space in the box?

Yeah, Rahul. Thanks for the question. No expected change in the cost of what we’ve guided to. This is really about warming up using some of our refresh palette colors, some environmental aspects, softer seating. We think we have a great opportunity. You’ve seen the full-service model be challenged to the modern consumer to deliver a relevant value proposition, and we think of our value proposition as quality, relevance, experience, and convenience. We’re able to deliver that quality food, relevant food, Mediterranean diet, number one ranked diet 7 years running, really that unique cuisine where taste and health unite, convenience, certainly with our digital channels and our fast format, and then experience. We think we can deliver great experience and an enhanced dining room aesthetic to drive even greater physical occasions as we drive greater digital occasions. So we’re just kind of reimagining how we show up in our dining rooms to make it more inviting and drive greater in-restaurant occasions and occasions across all channels.

That’s perfect. Thanks for that. Brett, I have a follow-up. Thanks for all your color on the connected kitchen initiative looks like there is a lot to look forward to here. Meanwhile, are there any low-hanging-fruit within your existing operational structure that can be addressed outside this in a shorter timeframe? Anything related to labor or in-store ops, anything that you guys can discuss here?

Yeah, I mentioned it just a bit ago. We think we have an opportunity to be more efficient with our labor hours and how we deploy our labor when we do our prep versus our peak times and how we create more consistent labor efficiency across both dayparts. And we are actually – yeah, and actually, that test was deployed this past week on the initial labor redeployments.

Understood. So does this involve any movement of like prep off-premise, more prep off-premise, or anything else related of such sorts?

No, it’s simply balancing out prep and cook and deployments to better match the revenue curves of the restaurants.

Perfect. That’s helpful.

Thank you. And there are no further questions in the queue at this time. So I’ll hand the floor back to Brett, for the closing comments.

I want to thank everyone for joining the call today. Before we sign off, I want to say once again how proud I am of our CAVA team for delivering a record year in 2023. With 72 net new restaurant openings and success in new and existing markets, we prove the portability and broad appeal of our Mediterranean concept. Our guests were resilient as evidenced by 10.4% traffic growth, and our powerful unit economic engine continued to deliver impressive results. We’ve built a solid foundation for the growth we can achieve as we create the next major cultural cuisine category, and we are making thoughtful investments to drive long-term growth, profitability, and shareholder value. Thanks again for joining us. Happy Spring on Friday, and I look forward to speaking with you next quarter.

Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines