The CEO of this highly-digital salad eatery inaccurately claimed his company was profitable; so, is Sweetgreen a good investment right now?
With so many companies going public via a SPAC merger these days, Sweetgreen (NYSE: SG) decided to take the traditional approach at the end of 2021, listed its stock at $3.00 higher than expected, and saw a tremendous few days, until finally correcting. Many analysts have compared the restaurant to Chipotle for its efficiency or Domino's for primarily being a tech company that also serves food. The comparisons, although valid, omit a very important detail:
Profitability.
At the end of 2018, when posed with the question, "Are you profitable?" Sweetgreen CEO, Jonathan Neman said, "We are." They weren't. Not then and not now; not even on an adjusted basis. What the company does have is a very hot metric so is Sweetgreen a good investment right now?
The bull case for Sweetgreen
Roughly 75% of all sales come from the digital realm; if you want to order from Sweetgreen, you need to create an account. This empowers the company to market to individual consumers and nudges anyone not purchasing with enticing offers, not to mention track performance and adjust accordingly for any given store or region. Business seems to have responded as according to the company's S-1, revenue is up 73%, restaurant-level profits surged nearly 380%, and profit margins have climbed 275%, year-over-year (YoY).
Moreover:
- Total revenue for 2021 was $339.9 million versus $220.6 million in the prior fiscal year, an increase of 54%.
- Total Digital Revenue Percentage of 67% and Owned Digital Revenue Percentage of 46%, versus Total Digital Revenue Percentage of 75% and Owned Digital Revenue Percentage of 56% in the prior fiscal year.
- Loss from operations was $(134.4) million and loss from operations margin was (40)% versus loss from operations of $(141.6) million and a loss from operations margin of (64)% in the prior fiscal year.
- Restaurant-Level Profit was $40.4 million and Restaurant-Level Profit Margin was 12%, versus Restaurant-Level Profit of $(8.7) million and Restaurant-Level Profit Margin of (4%) in the prior fiscal year.
- Net loss was $(153.2) million versus net loss of $(141.2) million in the prior fiscal year.
- Adjusted EBITDA was $(63.1) million versus Adjusted EBITDA of $(107.5) million in the prior fiscal year and Adjusted EBITDA Margin was (19)% versus (49)% in the prior fiscal year.
- 31 Net New Restaurant Openings versus 15 Net New Restaurant Openings in the prior fiscal year.
The bear case for Sweetgreen
Sweetgreen's AUV may be high, but that's probably because of all its stores, nearly all are in high-density urban areas like New York and Washington, D.C. As the company expands to more rural areas, that number is sure to drop. Additionally, compared to similar restaurants (like Chipotle), Sweetgreen's average meal price is higher for what most would consider a less substantial offering and it has a 15-minute suggested expiration time on its salads. The CEO's claim of profitability isn't the only questionable claim he has made as he had recently quickly deleted a LinkedIn post he made advocating for government-backed tax hikes for unhealthy foods. The company may have a loyal customer base, but with these strikes against it, can it appeal to new consumers or will people opt to pay less for 'more meal' that doesn't go bad so quickly?
So, is Sweetgreen a good investment?
Aside from our policy not to endorse a newly listed company, I feel that even long term, this company may be highly overvalued at its current price. Best to wait for further corrections and a few more earnings reports before taking a position.
Quickfire round:
1. Where is Sweetgreen headquartered?
Initially founded in Washington, D.C., the company switched its HQ to Culver City, CA in 2016
2. When did Sweetgreen go public and who is its CEO?
November 18, 2021. Co-Founder Jonathan Neman
3. How much is the average salad at Sweetgreen?
$10-11 plus tax
