Sweetgreen: Focusing on healthy food should benefit stocks (NYSE: SG)

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investment thesis

Sweetgreen, Inc. (New York Stock Exchange: SG) operates casual fast food restaurants in the United States and aims to serve healthy foods prepared with local, seasonal and organic ingredients. With the increase in health related diseases, there is a growing awareness about a healthy diet, so the The health food market has huge potential. However, although the market has huge potential, Sweetgreen is not profitable from an operational point of view. It incurred an operating loss of $134.4 million for the fiscal year 2021, compared to an operating loss of $141.6 million for the fiscal year 2020. The company went public in November 2021.

Furthermore, the restaurant industry is very competitive, with many local, national and regional chains. Thus, until such time as the company can generate consistent operating profits, it is best to wait and watch the stock.

a job

As of December 26, 2021, Sweetgreen owns and operates 150 restaurants. It has a presence in 13 states and Washington, DC. The company has a fixed restaurant opening rate. It opened 31 restaurants in fiscal year 2021. In 2022, management plans to open 35 new restaurants. The company aspires to operate 1,000 restaurants by the end of the decade. Hence, the management has good growth plans and a proven track record to show its ability to expand.

The opening of the new Sweetgreen restaurant.

sweet green

The company has a 5-channel model for ordering food. Customers can place the order through the mobile app or the website, and finally collect the order from their chosen Sweetgreen location at their convenience.

Customers can also order their customized Sweetgreen order and have delivery at a central station at their location within a predetermined time. This facility is particularly attractive to working individuals who desire healthier food options than what local restaurants and quick customer service chains offer. As of the end of fiscal year 2021, the company had 481 direct locations.

The company has its own delivery channel called Original Delivery Channel, which offers better delivery radius along with many offerings. They also operate through the Marketplace channel which often serves as an effective way to reach new digital customers who have not used their original mobile app or website before. Apart from this, the company also has an in-store purchase option.

A larger share of digital is a positive sign for future stock performance

For fiscal year 2021, 46.1% of revenue was from Sweetgreen’s digital channels. Including orders placed on the market channel, this digital share increases to 67.4% of fiscal 2021 revenue. Having a larger share of digital revenue shows that Sweetgreen is using technology well, which will help the company grow its customer base without opening more restaurants. The average order value (which is the dollar value of an order excluding taxes and any fees a customer pays) for orders placed on their digital channels is also significantly higher than for non-digital orders placed through an in-store channel.

Risks

Sweetgreen does not make a profit. The restaurant industry is highly competitive, with many of the company’s competitors also ramping up their digital presence after the onset of the pandemic. The company also faces a threat from food delivery markets such as Uber Eats (UBER) and Grubhub.

The company has incurred significant losses since its inception and expects that its operating expenses and capital expenditures will increase significantly in the foreseeable future. The main reason for this will be the company’s expansion plans.

Since Sweetgreen’s Native Delivery, Outpost, and Marketplace channels require third-party fees to be paid to fulfill deliveries, sales through these channels negatively impacted margins. However, over time, management expects to improve margins on the local delivery channels, precinct and market channels while expanding the reach of these channels. This can be achieved by negotiating lower third party delivery charges, and at the outpost by similar negotiations and/or more efficient delivery from carriers. However, one needs to wait and watch how this is achieved.

Finance is not very encouraging

For fiscal year 2021, the company generated revenues of $339.9 million compared to $220.6 million in fiscal year 2020. Losses from operations in fiscal year 2021 were – $134.4 million versus – $141.6 million in fiscal year 2020. Thus, the company’s revenue grew and its losses were reduced in year 2021.

At the same time, the change in same-store sales was positive in 2021.

2021

2020

2019

Average Unit Size (as modified) (in dollars)

$2,623

$2,194

$2,967

Same-store sales change (adjusted) (%)

25%

-26%

15th%

Data source: Sweetgreen.

In the first quarter, the company reported a 35% change in same-store sales.

Despite the encouraging signs, Sweetgreen posted a net loss of $49.2 million in the first quarter. At the same time, industry conditions are not very supportive of margin growth. A January 2022 report by the National Restaurant Association noted:

More than half of restaurant operators said it would take a year or more before business conditions returned to normal. Food, labor and occupancy costs are expected to remain high, and continue to impact restaurants’ profit margins in 2022.

SG . rating

Based on relative valuation, Sweetgreen stock, with a price-to-sales ratio of 5.3, looks expensive compared to peers from Cheesecake Factory (CAKE), Texas Roadhouse (TXRH), Chuy’s Holdings (CHUY), and Chipotle (CMG).

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Data by YCharts

Besides the fact that Sweetgreen is not yet profitable, the P/S ratio appears to be very high.

Conclusion

Even with the obvious growth potential in the health food industry and the company’s growth plan to have more than 1,000 restaurants by the end of the decade, it still had many challenges to overcome. First, it must become profitable from an operational point of view. Higher food, labor and occupancy costs, according to a National Restaurant Association report, may add additional pressure to the company’s financial statements.

Furthermore, the restaurant business is highly competitive as competition is rapidly adapting and improving itself in the digital ordering space where Sweetgreen expects to find revenue growth going forward. According to a report by BCG, the market share for delivery increased from 7% in 2019 to around 20% in 2020. The report also notes that across the industry, digital demand accounts for 28% of all orders after the pandemic compared to 10% before the pandemic. , with most brands showing increases. Therefore, Sweetgreen’s competitors are also using technology to boost growth.

The stock is also relatively expensive based on the P/S multiplier. Thus, although the industry is attractive, Sweetgreen stock should be monitored until the company shows signs of steady profitability.

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