Sweetgreen’s stock price has taken a beating over the past six months, shedding 43.4% of its value and falling to $5.25 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
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Why Do We Think Sweetgreen Will Underperform?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons we avoid SG and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
Same-store sales show the change in sales at restaurants open for at least a year. This is a key performance indicator because it measures organic growth.
Sweetgreen’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.2% per year.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Sweetgreen’s margin dropped by 10.8 percentage points over the last year. This decrease came from the higher costs associated with opening more restaurants.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Sweetgreen burned through $100.8 million of cash over the last year, and its $356.4 million of debt exceeds the $130 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Sweetgreen’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Sweetgreen until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Sweetgreen, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at $5.25 per share (or a forward price-to-sales ratio of 0.8×). The market typically values companies like Sweetgreen based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d recommend looking at a top digital advertising platform riding the creator economy.
Stocks We Would Buy Instead of Sweetgreen
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