Summary
- Today, we take our first look at restaurant operator Sweetgreen, Inc., who is aggressively rolling out new stores even in a difficult environment for the industry.
- Sweetgreen is quite innovative, sources from local and organic food providers, and gets 60% of overall sales from digital channels.
- Has Sweetgreen, Inc. stock fallen enough yet to "buy the dip"? An investment analysis follows in the paragraphs below.
Every discovery in pure science is potentially subversive; even science must sometimes be treated as a possible enemy .”? Aldous Huxley.
Today, we put Sweetgreen, Inc. ( SG ) in the spotlight for the first time. As you can see from the chart below, SG stock has done little but destroy shareholder value since coming public late last year. This is despite impressive revenue growth and innovation. The headwinds to the restaurant industry remain challenging, but has Sweetgreen entered " oversold territory" yet? An analysis follows below.
Company Overview
Sweetgreen is headquartered in Los Angeles, CA. The company currently operates approximately 180 fast-casual restaurants in 13 states serving healthy foods prepared from seasonal and organic ingredients. Sweetgreen also has online offerings. The stock currently trades around $9.50 a share and sports an approximate market capitalization just north of $1 billion.
What makes Sweetgreen unique is that they source from local and organic providers. They also make all their food from scratch every day in each restaurant as well as keeping their price point below $10. Core menu prices remained flat in 2022, a rarity in this industry dealing with historically high inflation levels.
Third Quarter Earnings
The company reported third quarter numbers on November 8th. Sweetgreen posted a GAAP net loss of 43 cents a share. Revenues rose 29% on a year-over-year basis to $124 million. Same store sales were up six percent compared to 3Q2021. Both top and bottom line results significantly missed expectations. Sweetgreen opened 10 new restaurants during the quarter and planned to open 35 overall in FY2022.
Leadership noted it now expected FY2022 revenues to come in at the low end of its $480 million to $500 million guidance. Adjusted EBITDA came in at a negative $6.8 million, a nice improvement from a negative $14.1 million in the prior year period. The average store is running at an average $2.9 million annual sales volume rate, compared with $2.5 million in the same period a year ago.
The company has done a great job growing their online presence. 60% of overall revenues came from online orders in the third quarter, two thirds of which were directly from the company's digital channels. In mid-November, Sweetgreen, Inc. announced the opening of its first advanced order vehicle pickup window, which will provide vehicles with an easy way to pick up online orders through a drive-up window. In October, Sweetgreen opened their first digital-only pickup kitchen. This pilot is important and could help " unlock additional markets with smaller square footage needs, lower build-out cost and improved return on invested capital" according to management. The company also plans to open two restaurants this year to test an automated production line dubbed the " Infinite Kitchen," which could radically lower staffing costs.
Analyst Commentary & Balance Sheet
Approximately 14% of the stock's outstanding float is currently held short. There has been no insider activity in SG stock so far in 2022. In the fourth quarter, several insiders unload approximately $700,000 worth of shares in aggregate. This followed much heavier insider selling in the third quarter. There was no insider activity through the first half of 2022.
Sweetgreen, Inc. ended the third quarter with just over $380 million in cash and marketable securities against no long term debt. The company posted a net loss of $47.4 million during the third quarter.
Five analyst firms, including Goldman Sachs and J.P Morgan, have maintained their Buy/Outperform ratings on SG since third quarter results posted. Four of these, however, contained downward price target revisions. Price targets proffered ranged from $13 to $25 a share. Morgan Stanley downgraded Sweetgreen following earnings to an Equal Weight From Over Weight with an $11 price target.
Verdict
The current analyst firm consensus has Sweetgreen losing $1.50 a share in FY2022 even as revenues rise 40% to just over $475 million. Analysts expected losses to narrow to $1.06 a share on average in FY2023 on better than 30% sales growth. Sweetgreen, Inc. stock sells at a reasonable two times revenues, given its growth. Significantly cheaper if one equates for the net cash on the company's balance sheet.
Sweetgreen is one of the most innovative I have ever analyzed in this industry. The company opened approximately 35 new stores in FY2022 and is also seeing organic growth. Over time, the company should continue to benefit from consumers seeking healthier eating options and its digital prowess. Sweetgreen's balance sheet is in good shape to support its aggressive store rollout plans.
That said, headwinds for the restaurant industry will remain formidable in 2023. Inflation will continue to boost costs over historical trends. The consumer has lost considerable buying power to surging prices since the beginning of 2021, and the personal savings rate is at its lowest levels since the financial crisis 15 years ago.
The labor market remains tight as well, and a recession is at least a 50/50 possibility over the next year. Therefore, Sweetgreen is a name I will keep an eye on. However, until Sweetgreen, Inc. gets closer to profitability, I will remain on the sideways in regards to its stock.
Every ideal is born in the future and dies in the past .”? Marty Rubin.
For further details see:
Sweetgreen: Not Tasty Enough Yet