2023-04-05 15:13:28 ET
Summary
- Sweetgreen plans 30-35 net new restaurant openings in 2023, a similar cadence to 2022, showing its investing confidence in this challenging environment.
- Sweetgreen is expected to increase this margin to a 15%-17% level in 2023. We think the company has strong bargaining power with its customers and suppliers.
- Sweetgreen's stock is apparently undervalued by 130%-160% using the comparable analysis.
Investment Thesis
Sweetgreen, Inc. ( SG ) plans to open 30-35 net new restaurant openings in 2023, a similar cadence to 2022, showing its confidence to invest in this challenging environment. Sweetgreen generated a 15% restaurant-level margin in 2022 and is expected to increase this margin to a 15%-17% level in 2023. We think the company has strong bargaining power with its customers and suppliers.
We think Shake Shack Inc. ( SHAK ) is an accurate valuation benchmark. The stock is apparently undervalued by 130%-160% using the comparable analysis. We rate Sweetgreen, Inc. stock buy.
Company Profile
Sweetgreen, Inc. was founded in 2007 and is a fast-casual restaurant chain that specializes in serving healthy, fresh, and locally sourced salads and grain bowls. As of December 25, 2022, the company owned and operated 186 restaurants in 16 states and Washington, D.C.
Revenue breakdown by channels (Company's filing)
The company generated 41% of revenues from its owned digital channels, 37% from the in-store channel, and 22% from the marketplace channel.
Operating metrics (Company's filing)
The average unit volume was $2.9 million, which grew by 11.5% and 19.5% in 2022 and 2021.
Key Takeaways from the Q42022 Earnings
Q42022 financials (Company's filing) Q4 operating metrics (Company's filing)
- Its total revenue increased 23% to $118.6 million from $96.4 million in Q42021.
- Same-Store Sales grew by 4% versus 36% growth in Q42021.
- Its AUV increased 11.5% to $2.9 million from $2.6 million in Q42021.
- Its restaurant-level profit margin was 11% decreased from 13% in Q42021, due to a one-off elevated cost of goods (tomatoes and romaine) caused by severe weather.
- The company has 10 net new restaurant openings in Q42022.
2023 outlook (Company's filing)
- The Sweetgreen, Inc. management projected 30-35 net new restaurant openings in 2023.
- Its revenue will grow 24% to $575 to $585 million in 2023.
- Its same-store sales will grow between 2% to 6%.
- Its adjusted EBITDA increased the range of -$20 million to -$10 million, a significant improvement from -$49 million in 2022.
We have the following comments:
- Sweetgreen, Inc. plans to open 30-35 net new restaurant openings in 2023, a similar cadence to 2022, showing its confidence to invest in this challenging environment.
- The company will raise its restaurant-level profit margin to 15%-17% level with increased customer traffic and menu prices. We continue to see its market potential and its strong base of loyal customers.
- Although the company generated more and more revenue from the marketplace channel (Uber Eats, DoorDash, etc.) in 2022, the company was able to leverage the expense through menu pricing adjustment. The percentage of other restaurant operating costs decreased to 17% in 2022 from 18% in 2021.
Competition Landscape and Growth Potential
SG, SHAK and MCD Store locations in Manhattan (Google Maps)
We think Sweetgreen and Shake Shack compete for the same market, as they are both fast-casual and have similar pricing levels. Based on the below analysis, we think Sweetgreen is very competitive and has significant room to grow.
Take the Manhattan area in New York, for example. Sweetgreen has 20 stores close to the midtown area, while Shake Shack has 18 stores across the island. However, Sweetgreen has much lower traffic after 3 pm than Shake Shack. Sweetgreen, though, generated an AUV of $2.9 million lower than that at Shake Shack of $3.9 million.
When compared to Shake Shack, which generates revenue mostly in 12 hours (9 am to 9 pm), Sweetgreen appears to have significantly greater traffic during peak times (9 am to 3 pm), especially considering that some of the Sweetgreen locations close during the weekend.
SG store traffic (Google Maps) SHAK store traffic (Google Maps)
The company is developing new menus including seasonal items and dinner choices. The company also indicated that they expect to generate revenues from attachments (e.g., salad dressing). This is an exciting area since the company has already been known for its salad dressing.
Local Supply Chain to Build its Moat
Sweetgreen's menu is focused on seasonal and local ingredients, and the company has partnerships with small and mid-sized farmers to source its produce. The company has built a differentiated, end-to-end supply chain that begins with more than 200 domestic food partners. Local sourcing means that ingredients are typically fresher. We think this practice could build a moat long term for the company over traditional fast food chains since nowadays consumers' awareness of health and food safety is on the rise.
In addition, to improve its good quality consistency and efficiency, the company acquired Spyce in 2021 to implement automation inside the company.
Valuation and Catalysts
Seeking Alpha analysts on average have Hold ratings for Sweetgreen, Inc. stock, while Wall Street analysts rate Buy. The valuation metrics below suggest the stock is expensive compared to its peers.
Valuation comparison (Seeking Alpha)
However, we think the company is still in the early growth stage, similar to Shake Shack, which was also growing at nice double-digit rates in 2022. Based on our analysis above, we think Sweetgreen is more competitive than SHAK and has more room to grow on a comp-sales basis (new menus and attachments). If we take SHAK as the valuation benchmark, Sweetgreen is apparently undervalued. We simply use comparable analysis, the stock upside potential is in the range of 130%-160%. We rate Sweetgreen, Inc. stock buy.
Valuation multiple (LEL Investment)
Catalysts to watch are its future earnings. We think as long as Sweetgreen can show it continues to grow comp sales, the market will soon reprice this stock.
Risks
Bankruptcy Risk
We think one of the market concerns can be bankruptcy risk, as Sweetgreen, Inc. generated a $150 million cash outflow in 2022. Cash on hands was $331 million.
Balance sheet (Company's filing)
However, Sweetgreen generated a 15% restaurant-level margin in 2022 and is expected to increase this margin to a 15%-17% level in 2023. In this challenging environment, the company still leveraged its expenses in all areas (labor, occupancy, and third-party delivery). We think the company has strong bargaining power with its customers and suppliers. They had 0 debt at end of 2022. In addition, Sweetgreen is projected to narrow its EBITDA loss to the $10-$20 million range. We are not worried about this risk.
Income Statement (Company's filing)
Macro Risk
U.S. Census data showed that food service & drinking places grew by strong double-digit rates in 2022, and the strength continued to Feb 2023 at 15.3%. The market is worried that if inflation persists, it will hurt the category of food consumed away from home. But, we believe that Sweetgreen, which caters to customers who follow a healthy diet, will be least affected. The target customers, who can buy a salad bowl in the $12-$18 range, are less price sensitive, and also less inclined to change their eating habits to save money.
Retail sales growth (U.S. Census Bureau)
For further details see:
Sweetgreen: A Gem In The Space