Cava trims sales outlook amid heavy competition. But it's wary of diving into the discounting fray.

By Bill Peters

'This is the most intense discounting environment since the Great Recession,' CEO says, adding: 'We're not going to discount our way to prosperity'

Cava reported quarterly earnings on Tuesday.

Mediterranean fast-casual chain Cava Group Inc. on Tuesday reported third-quarter results that missed Wall Street's estimates, as younger and middle-income consumers struggle with higher costs and competition remains stiff.

Cava shares (CAVA) fell about 10% after hours on Tuesday.

The company said it now expects same-store sales growth of 3% to 4% for the year. That's a bit lower than the 4% to 6% growth it forecast in August.

Revenue jumped 20% year over year to $289.8 million, helped by new restaurant openings. However, that sales figure was below FactSet estimates for $291.9 million. Cava earned 12 cents a share, a cent below analyst forecasts, while same-store sales growth of 1.9% missed Wall Street's estimates for 2.8%.

Cava Chief Executive Brett Schulman, in the company's earnings release, said the chain had gained market share during the quarter. But he told MarketWatch that consumers were dealing with an array of higher costs and a softening job market, while younger consumers were dealing with student debt and elevated unemployment. Higher health and rent costs were also issues.

"You've seen middle-income earners' wage growth stagnate in recent months," he said. "That part of the consumer segment have more headwinds this year than they had tailwinds last year."

The restaurant industry at large - from fast-food chains to sit-down restaurants - has tried to offer promotions and value deals to win back customers scared away by price increases over the past several years. Within the fast-casual segment, which tries to split the difference between those two types of restaurants, consumers have shown signs of waning interest in pricier "slop bowls."

Schulman suggested competing on the terms of a fast-food chain wouldn't be healthy for Cava longer term.

"This is the most intense discounting environment since the Great Recession," he said, adding: "We're not going to discount our way to prosperity."

During the third quarter, margins at Cava restaurants also dipped to 24.6%, compared with 25.6% a year earlier, due to costs related to more delivery orders, insurance, tariffs and the launch of a new chicken shawarma dish.

Schulman said most of Cava's ingredients come from the U.S., but some ingredients - like beef, olive oil and basmati rice - come in from abroad.

As of the close of regular trading Tuesday, shares of Cava were down 54.2% so far this year.

-Bill Peters

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(END) Dow Jones Newswires

11-04-25 2013ET