Sweetgreen: Impressive Growth But Valuation Is Sky-High (NYSE:SG) (2024)

Sweetgreen: Impressive Growth But Valuation Is Sky-High (NYSE:SG) (1)

Thus far in 2024, Sweetgreen (NYSE:SG) has turned out to be a stellar investment as the company is up over 160% YTD.

I first reviewed Sweetgreen back in December of last year and gave it a “Hold” rating. Since that time, the stock has certainly surpassed my expectations.

Let’s dive into the financials as well and the recent company changes to see if this company can continue to provide market beating returns.

Company Updates

In the most recent quarter, Sweetgreen opened six new restaurants. The new restaurants seem to be off to a great start as the company’s CEO Jonathan Neman stated on the Q1 earnings call, “Our Q1 2024 cohort of new restaurant openings, have an average weekly revenue, already outpacing the existing fleet average. Building on the momentum of the Totem Lake opening, which has quickly become one of our top-performing restaurants, the South Lake Union location in Seattle, had one of the strongest opening weeks in the company's recent history.”

I think this clearly shows there is a demand for Sweetgreen’s offering and the company has amble room to continue to expand. Neman stated as much on the call saying, “Openings like these, demonstrate that our brand has significantly greater reach than our current physical footprint, and that there is massive white space for our category defining concept.”

Sweetgreen is on pace to open between 23-27 new restaurants in 2024. Additionally, the company is planning to open 7 new Infinite Kitchen restaurants and retrofit 3 to 4 current locations. Management noted the company continues to see benefits from their Infinite Kitchens. These benefits include, faster throughput, portion consistency, and lower employee turnover.

Neman also mentioned new menu offerings on the earnings call. Sweetgreen launched various new steak related items, including their new, caramelized garlic steak. Neman stated that from a testing phase in Boston, the caramelized garlic steak was already becoming rather popular with patrons.

Management also mentioned making investments to foster a better environment for employees. Neman specifically mentioned giving bonuses to "head coaches" and creating opportunities to tip team members.

In my first article, I was critical of Sweetgreen’s culture as the Glassdoor reviews for the company weren’t great nor were the employees’ view of Neman. I understand this is a fast food (or fast causal) restaurant but compared to many peers Sweetgreen was still viewed as a less desirable place to work compared to many other restaurants.

For example, CAVA Group (CAVA) has better reviews (as I noted in a prior article) and in general appears to be doing a better job of engaging their employees and current future leaders through their Academy GM network.

For Sweetgreen, it was good to see that employee turnover in Q1 2024 was lower compared to Q1 2023 and the company seems to be promoting more internally as over 50% of Sweetgreen's “head coaches” are internal hires. Neman noted he’d like to see this percentage continue to grow.

Financials

In Q1 2024, Sweetgreen generated revenue of roughly $157 million, which was an increase of nearly 26% compared to Q1 2023. Despite still posting a net loss this quarter, Sweetgreen is closer to profitability compared to Q1 2023 as you can see from their Income Statement below:

Management noted this quarter same-store sales grew by 5% compared to prior year and restaurant level profit margin was 18.1% compared to 13.5% in Q1 2023. The company updated their 2024 outlook and are now expecting same-store sales to be near this 5% range and management is expecting restaurant level profit margin to be in the range of 18-20%.

Sweetgreen still has a healthy balance sheet, as you can see below:

The company’s cash balance has come down slightly since December 31, 2023, but Sweetgreen’s current assets balance can still cover all of the organization’s current liabilities.

Valuation

As you can see from the below valuation metrics from Seeking Alpha, the overall value grade for Sweetgreen is a “D+.”

As Sweetgreen is unprofitable, I think price to sales is the best metric to view this organization.

Sweetgreen: Impressive Growth But Valuation Is Sky-High (NYSE:SG) (5)

Sweetgreen appears to have a high price to sales ratio compared to peers in this sector, and the company's current price to sale ratio (forward) is much higher compared to where this ratio was at the beginning of the year.

I concur with Seeking Alpha’s assessment that this stock is likely overvalued. Sweetgreen’s stock has risen substantially this year, and I’d recommend investors waiting for the stock to drop back to January levels before considering adding shares.

Risks

Aside from the risks I mentioned in my previously article, one new risk I’d like to mention is consumer sentiment. As numerous news articles have stated, many consumers are feeling the rise of inflation. Recent earnings from McDonald's (MCD) and Starbucks (SBUX), illustrate the point that many customers feel the price of restaurant food (and drink) is too high. (Albeit, I think Starbucks has some operational issues as well).

New restaurant chains like Sweetgreen and CAVA seem to not be as affected so far in 2024. It might be these chains have superb offerings given the price. I know I’d rather spend $15 or $20 dollars on a healthy, nutritious meal compared to fast-food burger if the price was the same. It also could simply be these are the trendy restaurants for the times. If inflation continues to be sticky, it will be interesting to see if Sweetgreen has similar issues compared to these more established restaurants.

Conclusion

This was an impressive quarter for Sweetgreen. The rise in revenue and same-store sales growth is getting the company closer to profitability.

For long-term investors, it’s good to see the company’s new restaurants are doing well and there seems to be amble white space for the company to continue to grow. Additionally, I think the Infinite Kitchens will likely continue to provide numerous benefits to the company, ultimately increasing the restaurant level margin for those stores.

However, I can’t justify the company’s valuation given the dramatic increase in the company’s stock price so far this year. With the stock price up over 160% YTD, I'd be inclined to wait for a market pullback.

OA Research

I'm a financial consultant and lifelong investor. I like to focus on long-term and am particularly fond of founder-led businesses with growth potential.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Sweetgreen: Impressive Growth But Valuation Is Sky-High (NYSE:SG) (2024)
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