Summary
- Sweetgreen, Inc. posted a mixed Q3 earnings report as well as a slight decline in revenues.
- However, Sweetgreen, Inc. has shown continued discipline on costs and has a robust cash position, with some improvement in cash flow metrics as well.
- Sweetgreen appears well-positioned to weather the current consumer spending environment and readily generate profits & positive cash flow as soon as the situation improves.
Overview
Sweetgreen, Inc. (SG) is a company that operates a chain of fast-casual restaurants selling salads. It is "fast casual" owing to the fact that it provides more quality food and ingredients than a fast-food establishment, but does so via a similar approach. When you pop into a Sweetgreen restaurant, they make the salad for you on the spot but do not provide table service; this is akin to other fast-casual players such as Chipotle. The chain is notable for its farm-to-table food sourcing methods and has been a popular choice for people working in Manhattan, as per my anecdotal experience.
Having released earnings for Q3 2022 on 11/8/2022, Sweetgreen posted mixed results. While beating on non-GAAP EPS by $0.05, it missed on GAAP EPS by $0.07. Additionally, it missed on revenues by -$5.41M. While the stock initially depreciated in response to earnings, it has reclaimed some of the value that it lost in line with the overall appreciation of the market since then. This article will take a look through its financials to see the direction in which the company is headed.
SeekingAlpha.com SG 11.11.2022
Financials
Looking through the revenue figures, we see that Sweetgreen has shown mixed revenue results throughout the last several years. Likely owing to the pandemic and the associated decrease in in-office workers, it saw a revenue decline of 19.5%. It bounced back and achieved revenue levels beyond its pre-pandemic performance in 2021, with 2021 revenues coming in at 124% those of 2019.
SeekingAlpha.com SG 11.11.2022
The quarterly metrics show its performance in more granular detail. The company appeared to return to steady growth in 2021, but recently posted a small decline in revenues for its Q3 2022 revenues. Worth noting is that the firm has established a consistently positive gross profit, although its gross profit decreased more than its revenue decrease for the latest quarter.
SeekingAlpha.com SG 11.11.2022
Throughout the last 10 quarters, Sweetgreen has continued to do business at an operating loss. Adding its non-variable costs, Sweetgreen's net income results have also been negative. While the latest quarter showed a small improvement as to operating income, its net loss actually increased by 18.5%. Nonetheless, it showed a significant decrease in its G&A expenses as well as total operating expenses, indicating that it is exercising financial discipline in response to headwinds.
SeekingAlpha.com SG 11.11.2022 SeekingAlpha.com SG 11.11.2022
Cash from operations continues to be negative, although it seems to be hovering around a smaller banding in the last 2 quarters. Taking increased cost discipline into account, it is reasonable to expect this number to become positive within the next several quarters.
SeekingAlpha.com SG 11.11.2022
Looking further into the cash flow picture, we see that Sweetgreen is still generating negative cash flow per share – although the latest quarter showed an improvement.
It has not lost any cash to interest payments for the last 5 quarters, and the fact that levered free cash flow and unlevered free cash flow have been the same throughout proves this conclusively.
SeekingAlpha.com SG 11.11.2022
Going back to the balance sheet , we see that the company has also achieved a positive tangible book value during 2021, although this has been decreasing on a per-share basis. Total debt is $0, and the net debt figures show a positive, albeit slightly decreasing, cash position.
SeekingAlpha.com SG 11.11.2022
As indicated above, the firm appears to be drawing down on its cash reserves at the rate of roughly $30M per quarter. Nonetheless, it has the cash on hand to continue doing this for 30 quarters – which is plenty of time for most any business.
SeekingAlpha.com SG 11.11.2022
Conclusion
The fundamental picture for Sweetgreen looks sound. While it posted a less than impressive latest earnings report, along with a slight decrease in revenues, it has the cash on hand to continue operating well into the future. Additionally, it actually narrowed its cash flow loss in the latest quarter by 42.4% quarter-over-quarter and 57.1% year over year – certainly what I consider a healthy showing.
The books here tell a story of a company that is well positioned to weather ongoing consumer headwinds as well as achieve cash flow positive growth when the economy picks back up. Fast casual dining will continue to be affected by remote work as well as the overall consumer spending picture, but that will eventually sort itself out.
By virtue of its lack of debt as well as its discipline on costs and cash flow, Sweetgreen can readily become profitable and cash flow positive as soon as its revenues begin to materially increase again.
Seeing that the brand was popular when in-office work was in full-swing, I am of the belief that is indeed possible and quite probable. While the timing is difficult to predict, there are no hard pressures that Sweetgreen has to contend with as the economic picture continues to evolve. Considering all of this together, I consider Sweetgreen, Inc. stock a buy.
For further details see:
Sweetgreen: Well-Positioned And Could Get Sweeter