Why Cava Stock Plunged 30% in February

Shares of Cava Group (NYSE: CAVA) stock dropped 30% in February, according to data provided by S&P Global Market Intelligence. There was negative investor sentiment about economic policy, and the market was underwhelmed by management's 2025 guidance.

Adding some spice to fast-casual dining

Cava operates a small but growing chain of Mediterranean-inspired fast-casual restaurants. The concept is catching on, and Cava has been reporting high growth since going public almost two years ago. Management sees a large white-space opportunity, and it's been opening new stores at a steady pace. As of the end of 2024, it has 367 stores in 25 states plus Washington, D.C. It opened 58 in 2024 and plans to open another 64 or so this year.

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It reported strong results for the 2024 fourth quarter and the full year. In the fourth quarter, Revenue increased 37% year over year adjusted for a 53rd week in 2023. Comparable sales were up a phenomenal 21.2%. Restaurant-level profit margin was 22.4% adjusted, up from 21.9% the previous year. Net income was up from $2 million last year to $6.5 million this year, adjusted for a one-time benefit.

Is it losing its flavor?

So why was Cava stock down? It wasn't only Cava. Many restaurant chain stocks have been down as President Donald Trump lays out his plan for tariffs, which could impact some restaurants with higher prices on, for example, avocados from Mexico.

It's also not unusual for a stock price that's already high to get lower as earnings get closer. Investors hedged their bets against what could be a disappointing report, and that's how it played out, since the stock dropped further after the report.

Despite what was a uniformly excellent quarter, the market was underwhelmed by management's guidance for 2025. It's expecting comparable sales growth to slow down sharply to about 7%. Cava is an expensive stock, and it can't keep up its high price without commensurately high performance and guidance. Even at the current, lower price, it trades at a forward one-year P/E ratio of 122. That's a lot of market confidence, and there's a lot of expectation built into it.

If you are planning to hold Cava stock for many years, you can buy in at the price. However, it could be a bumpy ride, and you may want to wait for a better entry point or use a dollar-cost averaging strategy to build a position.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.