Is Sweetgreen’s Ambitious Growth Plan a Buy?

Sweetgreen (NYSE: SG) has been a darling of health-conscious urban dwellers for years. Even those who steer clear of salads have often been converted to raving fanatics after trying their tasty options and home-made salad dressings.

The most recent quarterly report revealed a mixed bag of news, so is this salad giant now offering investors a fresh bite of the apple, or is it time to let the stock sit on the shelf for a bit longer?

Revenue Growth Is A Strong Signal

Sweetgreen management reported revenues of $153.4 million for Q3 2023, representing a 23.7% year-over-year climb.

Sweetgreen’s ability to attract and retain customers in a competitive market speaks volumes but the kicker is where the growth is coming from, digital channels. Specifically, over 36.8% of revenue is originating from platforms like the SG app, and in turn is signaling that the salad giant is succeeding well in adapting to consumer preferences for online ordering and convenience.

As consumers find it ever more easy to order, they are doing so in higher volumes. Average Unit Volume, which is a key performance metric for restaurants, came in at $2.9 million per location. This may not sound as exciting as a new kale salad, but in the restaurant industry, AUV measures profitability, and Sweetgreen’s ability to keep this number elevated implies that’s it maintaining high efficiencies.

Still, it’s not all hunky dory when it comes to scaling across geographies. In spite of revenue growth, Sweetgreen’s operating costs remain high. Labor costs, for instance, jumped to $43.8 million this quarter due to increased wage pressures and ballooning staff numbers.

When you combine that with rising occupancy costs of $13.96 million it becomes clear that the company’s profitability is being squeezed. So, what’s the good news? Management is making a concerted effort to invest in automation, and that has the potential to reduce long-term costs, though results may not appear immediately.

Cash Flow and Liquidity Position

Investors often like to ask, “But how secure is the company’s cash?” Well, Sweetgreen reported $274.7 million in cash and cash equivalents at the end of the quarter.

For a growth-oriented company, this buffer certainly provides flexibility for future restaurant openings and technology upgrades, even absent the profitability. With 15 new restaurants opened this quarter alone, it’s clear they’re using their cash wisely to support controlled expansion of locations.

To-date, those new locations have combined to produce a net loss of $25.1 million this quarter. This sounds hefty, but compared to the $51 million loss during the same period last year, there is some improvement.

Plus, with automation and other cost-saving initiatives underway, Sweetgreen may very well move closer to profitability in future quarters. Of course, the question remains, are investors patient enough to wait for the flow of good news?

The Good and Bad

Sweetgreen is clearly winning over customers who are coming back again and again thanks to its brand appeal, which in turn is being converted steadily into revenue growth. Plus, the innovative approach to capturing the digital-first consumer has proven to be a winner.

With that said, profitability remains a distant goal so Sweetgreen is best now as a portfolio addition for investors with long-term perspective, and a belief that healthy eating as well as those who can stomach some short-term volatility,

For the more risk-averse, it may be wise to wait until costs come down or profitability is closer on the horizon. It should be clear to those who take the gambit that Sweetgreen isn’t just a salad company but rather is a bet on the future of fast-casual dining and tech-driven convenience.

But like any fresh meal, the question is: is it ready to be served, or does it need a little more time in the kitchen?

Is It Time to Buy or Hold Sweegreen Stock?

The ten analysts who cover Sweetgreen stock rate is as a Buy or Hold with the consensus price targeting sitting at $38.40 per share.

The sentiment has softened somewhat with 2 analysts downgrading their earnings estimates over the coming quarter and for sure, Sweetgreen is not for the faint of hear given the volatile share price movements.

It’s also trading at a high multiple to revenues and a high book-to-value multiple right now, suggesting weakness may be in the offing. That view is confirmed by a discounted cash flow forecast analysis that pegs as much as 39.8% downside potential from present levels.

To add insult to injury as far as the bulls are concerned, Sweetgreen operates with a pretty substantial level of debt so the thesis of scaling locations without encumbering the balance sheet still needs to be played out.

With all that said, what Sweetgreen does better than most is delight its customers, and that as Warren Buffett would say is the hallmark of a business that will always stay in business.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.