Sweetgreen (NYSE:SG) Reports Q4 In Line With Expectations, Stock Jumps 11.2%

Casual salad chain Sweetgreen (NYSE:SG) reported results in line with analysts' expectations in Q4 FY2023, with revenue up 29.1% year on year to $153 million. The company expects next quarter's revenue to be around $152 million, coming in 2.8% above analysts' estimates. It made a GAAP loss of $0.24 per share, improving from its loss of $0.49 per share in the same quarter last year.

Founded in 2007 by three Georgetown University alum, Sweetgreen (NYSE:SG) is a casual quick service chain known for its healthy salads and bowls.

The three thought that the market was missing a so-called fast casual option that offered healthy, fresh, and locally-sourced food. If it was fast, it leaned unhealthy and if it was healthy and fresh, it leaned upscale and full service.

Sweetgreen specifically offers salads and bowls that use fresh, organic ingredients. The ‘Guacamole Greens’, for example, is a cold salad that includes roasted chicken, avocado, and a slew of traditional salad ingredients. The ‘Shroomami’ is a warm bowl that features roasted tofu, warm portobello mushrooms, beets, warm wild rice, and a few other ingredients. You can alter existing menu items with substitutions, and if you’re really not inspired by what’s offered, you can feel free to create a completely custom salad or bowl.

The typical Sweetgreen customer is a health-conscious individual, often a busy millennial who wants a quick and convenient lunch or dinner without breaking the bank. These individuals care about the origin of their food, and Sweetgreen often has a board in their locations showing where each ingredient is sourced, down to the names of the farms themselves.

Sweetgreen’s locations feature a modern and minimalist vibe. Unlike traditional fast-food joints, these stores favor neutral colors, wood and exposed concrete, and plants. To cater to their often tech-forward customers, the company’s app features the full menu along with nutritional information about items. It also allows users to order ahead of time for pickup to maximize convenience and efficiency.

Modern Fast Food

Modern fast food is a relatively newer category representing a middle ground between traditional fast food and sit-down restaurants. These establishments feature an expanded menu selection priced above traditional fast food options, often incorporating fresher and cleaner ingredients to serve customers prioritizing quality. These eateries are capitalizing on the perception that your drive-through burger and fries joint is detrimental to your health because of inferior ingredients.

Competitors in the casual quick service industry include Chipotle (NYSE:CMG), CAVA (NYSE:CAVA), Noodles & Company (NASDAQ:NDLS), and private companies such as Chopt Creative Salad and Just Salad.

Sales Growth

Sweetgreen is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefitting from better brand awareness and economies of scale. On the other hand, one advantage is that its growth rates can be higher because it's growing off a small base.

As you can see below, the company's annualized revenue growth rate of 20.8% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was exceptional as it added more dining locations and increased sales at existing, established restaurants.

This quarter, Sweetgreen's year-on-year revenue growth of 29.1% was excellent, and its $153 million in revenue was in line with Wall Street's estimates. The company is guiding for revenue to rise 21.5% year on year to $152 million next quarter, in line with the 21.9% year-on-year increase it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 13.5% over the next 12 months, a deceleration from this quarter.

Same-Store Sales

Sweetgreen's demand has outpaced the broader restaurant sector over the last eight quarters. On average, the company has grown its same-store sales by a robust 9.9% year on year. With positive same-store sales growth amid an increasing number of restaurants, Sweetgreen is reaching more diners and growing sales.

In the latest quarter, Sweetgreen's same-store sales rose 6% year on year. This growth was an acceleration from the 4% year-on-year increase it posted 12 months ago, which is always an encouraging sign.

Gross Margin & Pricing Power

Sweetgreen's gross profit margin came in at 16.2% this quarter. up 2.9 percentage points year on year. This means the company makes $0.17 for every $1 in revenue before accounting for its operating expenses.

Sweetgreen has poor unit economics for a restaurant company, leaving it with little room for error if things go awry. As you can see above, it's averaged a 16.5% gross margin over the last two years. Its margin, however, has been trending up over the last 12 months, averaging 13.3% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment.

Operating Margin

Operating margin is a key profitability metric for restaurants because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, Sweetgreen generated an operating profit margin of negative 19.1%, up 21.1 percentage points year on year. This increase was encouraging, and we can infer Sweetgreen was more disciplined with its expenses or gained leverage on its fixed costs because its operating margin expanded more than its gross margin.

The restaurant business is tough to succeed in because of its unpredictability, whether it be employees not showing up for work, sudden changes in consumer preferences, or the cost of ingredients rising thanks to supply shortages. Unfortunately, Sweetgreen has been a victim of these challenges over the last two years, and its high expenses have contributed to an average operating margin of negative 29.9%. However, Sweetgreen's margin has improved, on average, by 20.2 percentage points each year, an encouraging sign for shareholders. The tide could be turning.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q4, Sweetgreen reported EPS at negative $0.24, up from negative $0.49 in the same quarter a year ago. This print beat Wall Street's estimates by 10.9%.

Between FY2020 and FY2023, Sweetgreen's adjusted diluted EPS grew 252%, translating into an astounding 52.1% compounded annual growth rate. This growth is materially higher than its revenue growth over the same period, showing that Sweetgreen has excelled in managing its expenses.

Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 23.5% year-on-year increase in EPS.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

Sweetgreen's five-year average ROIC was negative 75.3%, meaning management lost money while trying to expand the business. Its returns were among the worst in the restaurant sector.

Key Takeaways from Sweetgreen's Q4 Results

Revenue beat by a small amount and EPS beat by a more convincing amount. We were also glad that next quarter's revenue and adjusted EBITDA guidance came in higher than Wall Street's estimates. Finally, while full year revenue guidance was in line, adjusted EBITDA was better than Wall Street estimates. Overall, we think this was a really good quarter that should please shareholders. The stock is up 11.2% after reporting and currently trades at $14.19 per share.

Is Now The Time?

Sweetgreen may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

Sweetgreen isn't a bad business, but it probably wouldn't be one of our picks. Although its revenue growth has been exceptional over the last four years, its relatively low ROIC suggests it has struggled to grow profits historically. And while its new restaurant openings have increased its brand equity, the downside is its cash burn raises the question of whether it can sustainably maintain growth.

We can find things to like about Sweetgreen and there's no doubt it's a bit of a market darling, at least for some investors. But it seems there's a lot of optimism already priced in and we wonder if there are better opportunities elsewhere right now.

Wall Street analysts covering the company had a one-year price target of $13.50 per share right before these results (compared to the current share price of $14.19), implying they didn't see much short-term potential in Sweetgreen.

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