2023-05-09 04:41:53 ET
Summary
- The company has and will continue to maintain a strong momentum in 2023.
- Sweetpass is a paid membership. We believe this can make a huge difference.
- The stock is still significantly undervalued.
Investment Thesis
On May 4th, the popular healthy fast-casual restaurant chain Sweetgreen, Inc., (SG) announced positive financial results, including increased earnings and a surge in SG stock price. This news came on the heels of our previous coverage just one month ago, and since then, it has continued to rise by an impressive 30%.
Sweetgreen saw continued revenue momentum in Q1, with a 22% YoY increase in total revenue, same-store sales growth of 5%, and an improved restaurant-level profit margin of 14%. The company planned to open 30-35 new restaurants and expand into three new markets. Sweetgreen's paid membership program, Sweetpass Plus, has shown early success and is expected to drive margin improvements. The stock is undervalued compared to comparable companies and has significant upside potential. Investors should focus on average unit volume and restaurant-level margin metrics to assess the company's growth potential. The introduction of paid membership is a game changer. We raised our rating on SG stock to "strong buy."
Key Takeaways from Q1 2023 Earnings:
- In Q1, its revenue momentum continued to grow for the company, with a total revenue of $125.1 million, which was a 22% increase compared to the prior year period.
- Its same-store sales remained steady, with a 5% change, and the average unit volume was $2.9 million. Despite the inflation concerns, there were no signs of slowing down.
- Its restaurant-level profit margin improved to 14%, up by 100 basis points from the previous year, due to sales leverage and better labor efficiencies, partially offset by higher packaging costs and prevailing wage rates.
- Its EBITDA margin significantly improved due to revenue leverage, with an adjusted EBITDA of $(6.7) million and a margin of (5)%.
- The company opened nine new restaurants and expects to open 30-35 more in the future, with revenue ranging from $575 million to $595 million and a restaurant-level profit margin between 15%-17%.
Growth Drivers
In 2022, Sweetgreen successfully opened a total of 36 new restaurants, indicating the company's ongoing growth and expansion. In Q1 alone, Sweetgreen launched 12 new restaurants and planned to open between 30 and 35 more throughout the year, with the aim of entering three new markets.
Despite concerns over market saturation, we believe that the food away from home industry continues to provide growth opportunities for Sweetgreen.
The company's same-store sales growth was driven by both pricing and traffic, a promising sign for the future.
In addition, Sweetgreen had observed early indications of growth in attachment sales, including salad dressing and other products. We share the same view as management that this not only has the potential to increase sales but also improve margins. The company was confident that the attachment sales could further enhance its profitability in the future.
While still early, we' ve seen attachment dollars grow nearly 25% in the first three weeks of launch. We believe the margin opportunity with attachments presents another significant opportunity for Sweetgreen in the coming years
Restaurant level margin improvement
Sweetgreen has a loyal and affluent customer base that appreciates the quality of its food and the company's mission to support local suppliers. According to the company, Sweetgreen successfully launched a paid membership program, which has never been done by other fast-food chains like McDonald's (MCD), Chipotle (CMG), or Shake Shack (SHAK). We believe that the program has already shown signs of early success, and it could be a game changer for the company as it helps to offset inflation without having to increase menu prices.
For an additional $10 per month, Sweetpass Plus members can access a daily $3 offer, free delivery, limited edition merchandise, and other benefits. The program's launch went smoothly, generating great buzz.
We believe the program will drive margin improvements not only from the underlying membership fees, which come at limited costs, but also through incrementally across our customer base.
Risks
In Q1, inflation put pressure on ingredient costs for the company. However, despite this challenge, the company managed to improve its restaurant margin by implementing several initiatives. By leveraging the existing traffic, increasing prices, increasing attachment sales, and introducing membership programs, the company offset the impact of inflation on its top line.
We believe that this restaurant stock is well-positioned to weather the current inflationary environment. Unlike some other companies, it has multiple levers to mitigate the risk of inflation, rather than relying solely on price increases.
Valuation
According to our analysis, we believed that Shake Shack and Chipotle's stocks were comparable to Sweetgreen's. However, Sweetgreen's stock trades at a much lower P/S or forward EV/S ratio than Shake Shack and Chipotle, despite having high growth projections. We thought that the company's stock was significantly undervalued.
We thought that Sweetgreen was still in the early stages of growth, similar to Shake Shack, which was also growing at double-digit rates in 2022. Based on our analysis, " Sweetgreen: A Gem In The Space" , Sweetgreen earned more revenue during lunch than Shake Shack. As a result, Sweetgreen's average revenue per unit suggests that it has a greater market share and better unit economics during the lunchtime period compared to Shake Shack. Sweetgreen has a slightly lower restaurant margin of 15% than Shake Shack's at 18%. Overall, we believed that Sweetgreen was as competitive as SHAK and had more room to grow on a comp-sales basis through new menus and attachments. If we used SHAK as the valuation benchmark, Sweetgreen would be undervalued by 64% using comparable analysis. The introduction of paid membership is a game changer to us. Consequently, we rated Sweetgreen's stock as a Strong Buy.
Valuation multiple (Seeking Alpha) Growth forecast (Seeking Alpha)
Catalysts
Investors are advised to focus on two key metrics: average unit volume and restaurant-level margin, as we anticipate that the company's paid membership and attachment initiatives will drive superior performance compared to its peers over the medium to long term.
The above initiatives have the potential to increase the company's sales and improve its profitability. This, in turn, could lead to an increase in EPS and drive valuation multiple expansion.
For further details see:
Sweetgreen: Gone Beyond What We Anticipated (Rating Upgrade)