MCD - Sweetgreen: Revenues Improve Yet Still Unprofitable

2023-12-21 12:34:59 ET

Summary

• Since Sweetgreen went public in 2021 the stock has since fallen nearly 80%, although the company has recovered in 2023 as revenues have grown.
• The company is led by its three co-founders who have stated the mission of Sweetgreen is to build healthy communities by connecting people to real food.
• Sweetgreen is still unprofitable, faces stiff competition and has a notable amount of negative employee reviews.

In the hot IPO year, which was 2021, many of the companies debuting had lofty expectations (and often lofty valuations).

One particular restaurant company had such expectations and was often compared to Chipotle Mexican Grill, Inc. ( CMG ). The company's CEO even said , "We like to say we want to build the McDonald's of our generation."

This company's stock soared on the day of its market debut, closing up 76%. However, since that time that stock has fallen dramatically and is down nearly 80% since their 2021 IPO.

Thus far in 2023, the company's stock has fought back as it's up over 30%. The company's revenues have been growing as have their number of locations.

The company is Sweetgreen, Inc. (SG). Let's dig into the details to see if this restaurant chain can keep off the positive momentum of 2023 and carry it into 2024.

The Company

Sweetgreen was founded in 2007 by three Georgetown students, Jonathan Neman, Nicolas Jammet, and Nathaniel Ru. The trio wanted to create a restaurant that was fast that had good, healthy food from local farmers. The company's mission is "Building healthier communities by connecting people to real food."

Since that time Sweetgreen has continued to grow as some have even stated, this fast casual dining will be "the Starbucks of salads." I don't think you can give Sweetgreen such a label yet but the organization seems to placing emphasis on the right areas such as being plant-forward, sourcing their food locally, prioritizing organic foods, avoiding fake, artificial flavors, and ensuring their food meets strict standards.

Sweetgreen is also focused on being a sustainable organization and is committed to being carbon-neutral by the end of 2027 . Sweetgreen seems to be doing well in this area so far as their plant-forward menu means their typical meal is on average already 30% less carbon intensive than the average American meal.

Sweetgreen's three co-founders are still with an organization which I view as a positive. Neman is the company's CEO, Ru is the company's Chief Brand Officer and Jammet is the company's Chief Concept Officer.

Moat and Opportunity

I believe Sweetgreen has opportunities to continue to expand operations. As you can see from this graphic from an investor presentation which occurred in June of this year the company had 204 total restaurants:

There is certainly room for Sweetgreen to add more locations, especially in areas such as the South, Midwest, and West where there are limited stores or no locations in certain states.

As you can see below the company has a small store footprint compared to many other fast foods and fast casual companies:

I think it's a little premature to be comparing Sweetgreen to Chipotle or McDonald's Corporation ( MCD ). On the Q3 2023 earnings call management noted they will add somewhere around 23-28 new stores in 2024. There is a long way to go to catch up to these more established players but as the map above illustrates there are lots of opportunities to expand.

I think the company's Infinite Kitchens are an interesting concept which should help the company cut down on costs. As the company's CEO, Neman noted on the earnings call, " …The Infinite Kitchen was recognized by time as one of 2023's best inventions in the food and drink category. It was selected as one of 200 groundbreaking inventions for leveraging automation technology to create a speedier, more precise way to assemble menu items while bettering the customer-employee experience."

Sweetgreen is planning on deploying about 7-9 Infinite Kitchens next year and will retrofit a few older stores as well.

This is absolutely no moat for Sweetgreen. Not only are they competing against other fast casual restaurants such as Panera and Chipotle, but they are also competing against fellow salad company rivals such as Chopt and Just Salad.

Their efforts to work with local farmers and cook, healthy organic products are certainly commendable but not a differentiator in my opinion as numerous other restaurant chains have a similar, if not identical, playbook.

Management

Jonathan Neman is the current CEO of Sweetgreen and as noted above is one of the company's co-founders .

Mitch Reback is the company's current CFO. Reback has worked at Sweetgreen since 2015. Prior to Sweetgreen Reback was the CFO at Drybar and has held numerous leadership positions at companies such as Johnson & Johnson and Neutrogena.

The Glassdoor ratings for Sweetgreen were a little surprising to me. As you can see below most employees don't recommend the company and Neman's ratings aren't stellar either:

I do understand this is fast food (or fast casual if you prefer that term) but Sweetgreen scored lower than Chipotle and even McDonald's. For a health-conscious restaurant with the co-founders still onboard, I find these poor reviews surprising.

Financials

In Q3 2023 , Sweetgreen generated revenue of roughly $153 million which was an increase of nearly 24% compared to Q3 2022. Same-store sales also increased by 4%.

The company's operating expenses have also come down as management noted stock-based compensation has come down in 2023 and will continue to decline in 2024 and 2025 which I view as a positive.

However, the company is still generating net losses as Sweetgreen has yet to become profitable since their IPO.

Sweetgreen does have a solid balance sheet as you see below:

The company's cash balance is nearly $275 million, and their current assets balance can cover all the organization's current liabilities. Sweetgreen also has no debt.

Risks

Sweetgreen lists numerous risks to the business in their annual report . I'm going to discuss two risks which I believe could hurt the organization.

One obvious risk for a restaurant company is food safety. Numerous restaurant companies such as Chipotle have had food safety issues . I think given the food Sweetgreen is serving it puts them at a higher risk. For example, rice and beans are two essential ingredients for Chipotle. Both are relatively safe, and easy to store and maintain. On the other hand, Sweetgreen has numerous produce products which will go bad much quicker.

For all public companies, it's now vital to maintain their brand image. Companies such as Bud Light and Target have been hurt in 2023 as their brands suffered due to company mishaps. A marketing blunder or food safety issue could certainly hurt the Sweetgreen brand. Furthermore, I think maintaining a positive working environment for employees matters. I get that this is a low-paying job in the food industry, but the reviews on Glassdoor were surprising to me. Employees are Sweetgreen are far less highly to recommend working there compared to McDonald's, Starbucks, and Chipotle.

Valuation

As you can see from the below valuation metrics from Seeking Alpha, the overall value grade for Sweetgreen a "D-."

As Sweetgreen is unprofitable, I think price to sales is the best metric to view this organization.

In this case, Sweetgreen appears to have a high price-to-sales ratio compared to peers in this sector thus I concur with Seeking Alpha's assessment that this stock is likely overvalued. Like most of the market, Sweetgreen's stock has risen substantially this month as it's up over 15%. I'd recommend investors waiting for the stock to drop back to November levels before considering adding shares.

Conclusion

I think Sweetgreen is an interesting company with both positives and negatives. I like the company's three co-founders are still with the organization. Revenue has been growing as the company continues to expand and launch new locations. The Infinite Kitchen concept sounds promising and will hopefully be able to help the organization cut costs.

For negatives, I worry about competition as this is a highly competitive industry. Also, I wonder if healthy, locally sourced food is really a differentiator. If the consumer is faced with cutting costs due to this macro-environment, I could easily see consumers opting out of getting a salad that's $15. Furthermore, the company culture worries me as well given the negative Glassdoor reviews. Also, Sweetgreen isn't profitable, and I doubt the company will be in the near future.

For now, I'm going to wait and see how Sweetgreen continues to perform. I'd like to see the company get closer to profitability, continue to add new stores, and work to better the experiences for their employees.

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