• Brett Schafer

Not So Deep Dive: Sweetgreen Stock



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Show Notes


(Ryan) What they do: Sweetgreen is a fast-casual restaurant concept that serves salads. For simplicity purposes, think the Chipotle of salads. This is not a franchising model, they are the owner and operator of all their stores. And they have 150 stores throughout 13 states and Washington DC. The majority of their stores are in the northeast, but they also have 26 stores in CA and a few in Texas.


The menu is pretty comprehensive. They’ve got a few recommended salads but you can also build your own. And I think the average price is just over $10. Sweetgreen has a little over 200 domestic food partners/suppliers, that it procures its food from. A lot of the supplier relationships are localized as well, so the partners are in close proximity to the stores.


The majority of their sales come through digital channels (mostly their own, but also some through 3P delivery networks like doordash). And their app is built using Olo’s white label solution. Not too hard of a business to grasp.


(Ryan) History: The company has a pretty interesting backstory. Three Georgetown students basically saw the market opportunity for a healthy fast-casual restaurant (I imagine they were inspired by Chipotle). The three founders are named Jonathan Neman, Nicolas Jammet, and Nathaniel Ru and around 2006 they developed a business plan to build a Sweetgreen location down the street from where they were living. They were able to muster up $300k from friends and family for funding, and the first store was a hit, so they continued to add more around the area and the rest is history.


They IPO’d in 2021, so less than 6 months ago.


(Brett) Industry/Landscape/Competition:

  • Chain restaurant industry valued at $150 billion and was growing virtually every year before the pandemic

  • Global wellness and health food market expected to grow at a 9.2% CAGR (these are just estimates though),

  • Competitors: All places people buy food at.

  • Specific competitors for the lunchhour fast casual food: Chipotle, Panera, Panda Express, many others.


(Ian) Management and Ownership:

  • Jonathan Neman (knee-min) is the co-founder and CEO

  • Opened first location just three months out of college in Georgetown, DC.

  • This has been his life

  • In the news for a later-deleted linkedIn post basically making the case that curbing obesity was the best way to combat COVID

  • He owns over 5% of the company

  • The other cofounders own an additional 7.5%

  • Pretty high insider ownership


(Brett) Valuation:

  • Market cap of $3 billion, ticker SG

  • EV technically a lot lower but wouldn’t use that with them (explain why)

  • P/S of 8.8

  • Unprofitable/not cash flow positive so let’s try to do a contribution profit

  • Subtracting out food/packaging (28%), labor (32%), occupancy (15%), and other restaurant expense (13%) as a % of revenue and you have 12% margins. But this is before corporate level opex and D&A

  • Assuming operating margins could be at 10% that would give the stock a P/OI of 88

  • Expecting pretty heavy share dilution given their granting pace and commentary from management


(Ryan) Earnings:

  • 2021 Revenue was ~$340M, up 54% YoY

  • SSS up 25% YoY, but dropped significantly during COVID. Still yet to get back to their pre-covid AUV levels

  • 67% of their revenue came from digital channels, down slightly from last year.

  • Of their digital revenue, almost 70% is from owned channels instead of 3rd party delivery services

  • They are not profitable any way you look at it, but in 2019 they had restaurant level profit margins of 16% (that is basically excluding corporate expenses, so G&A, depreciation and amortization, etc.)

  • And they ended the year with 150 locations, up 26% YoY


(Ian) Balance sheet and liquidity:

  • $472mm in cash

  • No debt, but do have leases

  • Should change going forward


Anecdotal Evidence:

  • (Ryan) Went there on a regular basis when I was around the DC area.

  • (Brett) app was okay. Have never eaten it but it reminds me of simple things I can make at home for20% of the cost so idk how much I would go there unless I had tons of spending money

  • (Ian) It’s popular with many of my new coworkers.


Future growth opportunities:

  • (Ryan) Dense store expansion. They highlight this as sort of a tenet of their expansion strategy. Basically, this just means opening lots of stores in a single location or city. They say in their S-1, “In the markets in which we operated at the beginning of fiscal year 2014, we more than tripled our restaurant count from fiscal year 2014 to fiscal year 2019, and in parallel our AUV grew in those markets by approximately 85% over the same period.” All in all, store expansion is going to be the main driver of growth from here. Streamlining store operations, expanding the menu, and adding new pickup channels could all help with AUV, but if you’re investing today it’s because you think they can get to 1,000+ stores eventually.

  • (Brett) One of the keys to them getting to profitability is same-store sales growth. And I think an expansion into legitimately healthy smoothies (as opposed to somthing at Jamba) could help with this in three ways. First, it could drive higher spend per order (a wealthy consumer who just worked out would likely be willing to spend $20+ on a bowl and a smoothie). Second, they would be perfect for the rapid digital orders they are trying to do. Third, it could help them get into catering by making a more complete offering for small events.

  • (Ian) Sweetpass, for $10, you can get a $3 credit once each day for 30 days (potentially $90). Subscriptions haven’t seemed to work great for restaurants. This makes some sense to me, should have more info in Q1.


Highlights and lowlights:

  • (Ryan) Highlights: My customer experience was great there. I loved the salads. I think they’ve certainly found product-market fit and over the last decade, AUV and store growth have both been good. Lowlights: It’s a little hard for me to forecast what profitability is going to look like (Do I just comp it to Chipotle?), and I’m not in love with the management team.

  • (Brett) Highlights: great concept, strong same-store sales growth, seems like they should have decent sustainable pricing power. Lowlights: labor costs, SBC, why aren’t they operating cash flow positive?

  • (Ian) Highlights: Branding. Clear path to store growth. All three founders still involved. Lowlights: Margins, prices (double-edged sword)


Bull case:

  • (Ryan) You basically have to be assuming this is the next Chipotle. That this will be a national chain with 1,000+ stores and 15% operating margins. They say they think they can reach 1k over the next decade, I do think they can but there is already a ton of growth priced in.

  • (Brett) At current valuation you need to expect 1k stores is achievable + solid comp store growth. At 1k stores + $4 mil AUV that is $4 billion in revenue, on 10% operating margins that is $400 million in operating income. Stock probably does pretty well if that is achieved over next 10 years.

  • (Ian) Sweetgreen becomes the clear market leader, enters new markets, hits their 1000 store goal and gets chipotle-level multiples (55x EBIT). In my mind, the bull case here depends on what multiple it can demand (20x EBIT for McDonalds).


Bear case:

  • (Ryan) Margin compression. Or, they find lots of competition in their new states. There are plenty of competitors in this space, Grabbagreen, Tossed, and tons of regional players.

  • (Brett) The biggest bear cases for me are margins + SBC. Everything else looks fantastic. But those are really important things.

  • (Ian) Margins are tight and Sweetgreen isn’t unknown or boring. It’s too cool and the valuation reflects high expectations. With tight margins and high stock-comp, returns could be hard to come by from here.



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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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