2023-07-27 05:35:08 ET
Summary
- Sweetgreen is a fast-casual restaurant chain specializing in fresh, healthy, and customizable salads and bowls, with a strong focus on sustainability and technology integration.
- The company operates in a competitive industry but has several competitive advantages including a health-focused brand, sustainable sourcing, and strong customer loyalty.
- Opportunities for continued growth include geographic expansion, menu innovation, and digital marketing, allowing the business to continue its current trajectory.
- Margins are improving rapidly, with current restaurant-level profit margins impressive.
Investment thesis
Our current investment thesis is:
- Sweetgreen has achieved impressive growth through exploiting the growing trend of convenient healthy eating. We expect this trend to be sustainable in the coming years, primarily due to increased awareness and the lack of highly regarded options. With strong revenues, SG has the potential to be a leading player in the segment.
- SG's investment in technology and digital marketing is supporting its growth trajectory, alongside generating operational improvement.
- Margin improvement should be consistent in the near term, although there is a lack of visibility where the business will land.
Company description
Sweetgreen ( SG ) is a fast-growing fast-casual restaurant chain founded in 2007 that specializes in providing fresh, healthy, and customizable salads and bowls. The company is committed to sourcing locally and sustainably to offer customers a wholesome dining experience.
Share price
SG's share price has significantly underperformed, with the share price listing coinciding with a bear market. The poor sentiment is a reflection of the company's financial performance and future expectations.
Financial analysis
Sweetgreen financial analysis (Capital IQ)
Presented above is SG's historical financial performance.
Revenue & Commercial Factors
SG's revenue has grown well in the last 3 years, generating a CAGR of 20% during this period. Growth has been materially impacted by the pandemic but the trajectory looks highly positive.
Business Model
SG's focus is on providing salads and bowls in a convenient manner. A key component of this is offering customers the ability to customize their salads and bowls, allowing them to choose from a wide range of fresh and organic ingredients. The target is clearly to capture the lunch market, where many people are looking for a quick option of high-quality food at a competitive price.
The focus on fresh and healthy food is a key selling point for the business, as the traditional quick options for consumers are generally unhealthy or of low quality. Increasing consumer awareness of health and wellness is driving demand for nutritious and fresh dining options, positioning SG to perfectly exploit this trend. Further, this trend leans perfectly into lunch options, as those seeking to be healthy are more likely to cook at home post-work (albeit being healthy can also mean cooking making lunch at home). Although we do not expect healthy options to gain a leading slice of the market, the healthy segment has a long runway for growth, rebuffing any suggestion of saturation. The lack of a clear market leader in the space supports this, representing a compelling opportunity.
As the following illustrates, the interest in the business has been on a consistent upward trend, as an increasing number of individuals look into the business. This is critical for brand building nationally in the US, which will support the development of the business following this growth phase.
Further, SG utilizes technology through its mobile app, ordering kiosks, and online ordering system to enhance customer convenience. It is a critical development as consumers increasingly incorporate technology into their lives and tie habits to this use. SG has a membership scheme similar to the leading QSR brands, offering consumers loyalty rewards and perks. This has shown to drive recurring sales and provide invaluable insight into consumer spending. An interesting dynamic is that G has a paid platform for $10, offering enhanced benefits including a $3 discount daily. The value is seemingly obvious, as it drives enhanced volume. On paper, we like this a lot but we are slightly skeptical as there is a reason its peers have not chosen to do this previously.
Additionally, technological development has allowed SG to streamline the ordering process. SG has been able to maintain its hype, servicing its long lunch time queues and improving efficiency significantly. SG looks to be doubling down with this, developing the concept of an "Infinite Kitchen". This creates a frictionless experience where conveyor belts and tech allow the business to serve consumers.
Jonathan Neman, the brand's CEO and co-founder, stated,
We believe that automation will enable us to elevate the quality and integrity of our food, while also providing a faster and more convenient experience for our customers, and a better, more dynamic job for our team members. With the integration of our Sweetgreen Infinite Kitchen in our restaurants, we can unlock efficiencies that will enable us to grow more quickly as we scale.
This has the potential to revolutionize its financial profile, supporting strong development in both growth and margins.
SG has cultivated a loyal customer base through its focus on the core competencies we have discussed above. Through our research of the business, we understand its lunch time queues can be extremely long, illustrating the boots-on-the-ground interest for the offering. In the most recent quarter, same-store sales increased 5%, a sustainable level we feel given the strong demand and technological development.
As the following review excerpt explains, the general view of SG is highly positive. Consumers buy into the healthy options, they consider its commitment to environment concerns to be genuine, and importantly, the food is good. There was a recurring mention of the price being on the higher end, however, given the target market is generally those who work in cities (and lunch time), we are not overly concerned.
The Forest Scout NY Times www.glutenfreedairyfreereviews.com/
The natural development from here is to further optimize its service, focusing on improving areas of weakness and expanding areas of strength. Our expectation is for the business to maximize its stores through expanding its menu, potentially developing its dinner options through more hot foods. Further, the business could consider increasing the number of snacks and potentially having breakfast options.
Given the size of the business, a key driving of growth will be continued new restaurant openings. Management is targeting 30-35 new restaurants in 2023, having already opened 9 in Q1. Given the strong commercial profile, brand development that is ongoing, and strong demand for the product, we believe this trajectory should continue. So long has same-store sales growth remains in excess of c.2%, and average unit volume growth is healthy, there is no reason why store growth should not continue to be high. SG remains on track to have 1000 locations (c.204 locations currently). The business is currently constrained by its cash generation, restricting its ability to expand in line with demand.
In conjunction with growing its US audience, expanding its presence into new markets and regions is critical. The business would perform extremely well in London, Paris, Milan, and other metropolitan cities, even more than other US cities in our view. We expect Management to target these markets in the coming years, supporting a similar growth trajectory to New York. This will further support brand development.
Margins
SG is currently loss making, with what looks like a concerning EBITDA-M at (24)%. Much of this is an investment to drive growth in the business (and SBC). Although we do not like the metric "Management adjusted EBITDA", it is worth highlighting that the margin of this is (5)%.
Adj. EBITDA reconciliation (Sweetgreen)
Further, Restaurant-Level Profit was $16.9m in Q1'23, representing a RL profit margin of 14% (+1ppt YoY). This is quite impressive given the size of the business, illustrating what is an underlying strong performance.
When factoring in the benefits of scale as the business grows, and its investment in technology to drive efficiency, the business is on a rapid trajectory toward profitability.
Balance sheet & Cash Flows
SG does not utilize any loan facilities, with only lease liabilities on its Balance sheet. SG is currently burning cash, with a CFO of $(29)m and Capex of $(110)m in the LTM period. Cash sits at $297m in Q1, implying it can sustain these levels for c.3 years. Realistically SG will need to raise debt or cash through equity, given cash flows will likely not be high enough to fund further growth.
Outlook
Presented above is Wall Street's consensus view on the coming 5 years.
Analysts are forecasting a continuation of the company's strong growth, with a CAGR of 22% into FY27F. Based on a combination of store growth and continued brand strength, this looks to be a reasonable assessment.
The margin outlook is less impressive in our view, but still positive. Analysts are forecasting EBITDA profitability in FY24F, followed by small incremental improvements from there.
Valuation
SG is currently trading at 3.5x LTM Revenue and 2.8x NTM Revenue. This is a discount to its (short) historical average and industry average.
With the significant growth ahead, much of which looks reasonable to forecast given it is tied to store growth, this multiple will contract rapidly in the coming years. Based on the company's forecasting FY27F results, it is trading at an implied 5YF revenue multiple of 1.3x.
Key risks with our thesis
The key risk to our thesis is the derailment of the current growth trajectory. Given the only negative we have seen is pricing, there is a concern that new market entrants undercut the business, even if it's only local restaurants. We do not believe "healthy options" by the traditional QSR brands represents a sufficient threat to slow the business.
Conclusion
SG looks to be a well placed business to exploit changing consumer preferences. The currently segment of healthy eating is somewhat underserved, with a lack of broad choices for consumers when compared to QSRs. Reviews imply the offering from SG is compelling, and its growth trajectory and rapid restaurant expansion supports this.
The only real concern with the business is the medium-term visibility of margins, which is unclear. We are expecting healthy improvement but Analysts believe an adjusted EBITDA-M of 6% in FY27F is likely, which in our view would be underwhelming. This said, with rapid growth and the associated multiple compression, we believe SG stock is attractively priced.
For further details see:
Sweetgreen: On A Path To Expansion In A Competitive Industry