Sweetgreen: Infinite Kitchens Will Drive Future Growth and Efficiency (SG)

From my previous review of Sweetgreen (NYSE:SG) in May, the stock rose slightly, though not as much as the S&P 500. Still, the stock is up more than 170% YTD, far outperforming the S&P 500.

Let’s take one see why this stock is rising and research the company’s recent financial performance.

Innovation with a renewed focus on employees

During the quarter, Sweetgreen completed their first Infinite Kitchen upgrade, which took place at the company’s Penn Plaza location in New York City. The upgrade took seven weeks, but the company was able to keep the location partially open during the upgrade. The transformation at this location is already paying dividends as customers can get their food in less than four minutes!

Company CEO Jonathan Neman has this to say about the Penn Plaza transformation:

As for Penn Plaza, I think if you go and experience it, it’s pretty amazing. That is, we deliver food in less than 3.5 minutes. If you had been to that store before peak, you would have been standing in line, 10 minutes to 15 minutes, and then once you started ordering, you probably had about 3 minutes until you got your food. So now you can enter. Almost the way we designed it, with kiosk ordering as well as concierge ordering, there’s virtually no waiting to order, and your food is available in 3.5 minutes.”

I think this is quite an impressive achievement as many customers are not willing to wait for their food/drinks. For example, before Brian Niccol took over at Starbucks ( SBUX ), the company noticed that customers were reluctant to place their orders on mobile after seeing the expected wait times. I don’t think this trend will go away, as many consumers would choose an alternative if they were forced to wait a long time for their food.

I believe the Company’s stores with Infinite Kitchens will continue to create high production levels and create operational efficiencies, including the need for less staff at Infinite Kitchens locations. On the Q2 earnings call, Neman said the company is on track to open 7 new restaurants with Infinite Kitchens and upgrade 2-3 more locations this year.

Now back to Sweetgreen employees and culture, in my first article one of my concerns surrounding the company was Neman’s poor Glassdoor ratings and reviews as CEO. Fast food and fast casual generally have mediocre scores compared to other companies given the nature of the restaurant industry, but I found Sweetgreen to score particularly low, especially compared to another performing in this year’s restaurant space, CAVA (CAVA).

I was happy to hear that staff turnover has leveled off and management has noted that head coach tenure is increasing. On the earnings call, Neman noted the positive changes the organization is making to retain employees and create future leaders for Sweetgreen. Neman stated:

Part of our culture is creating an ownership mindset, and our incentives are aligned with these values. These incentives include bonuses and equity grants for our head coaches. As we prepare for more restaurant openings in the coming years, we are building a strong pipeline of future head coaches and are excited about the growth opportunities for all of our team members. That is why we have we focused on investing in the employee experience, including improving our learning path with an emphasis on leadership skills such as performance management, culinary skills and hospitality.”

With valuable incentives, advancement opportunities and proper training coupled with the infinite kitchens, this should help improve the employee culture at Sweetgreen.

Recent Finances

Sweetgreen posted sales of approximately $185 million in Q2 2024, which is a 21% increase from the prior-year quarter. Although the company is still unprofitable, as you can see below, the company is getting closer and closer to GAAP profitability:

For the quarter and YTD, the company’s operating expenses are down compared to 2023. A decrease is restructuring expenses account for a large part of the difference, but there is also a decrease in G&A expenses, which management noted was due to lower compensation expenses per share, which is definitely a positive thing for investors.

In the quarter, same-store sales were up 9% year-over-year. 5% of this increase was due to increased menu prices and the rest came from positive traffic. Restaurant margin was 22.5% for the quarter, up from 20.4% a year earlier.

Management updated its guidance for the year and now expects revenue in the range of $670-680 million, with same-store sales growing 5%-7% and restaurant-wide profit margin around 20% . Sweetgreen anticipates opening between the 24th and 26th for the full fiscal year.

The company still has a strong balance sheet, with $244 million in cash and enough current assets to cover all of its current liabilities.

ASSESSMENT

Sweetgreen has a “D+” rating on Seeking Alpha:

Since Sweetgreen is still unprofitable, I think the price of sales is probably the best measure for this organization.

Sweetgreen’s direct current PS ratio is higher than the median current as you can see from the table above. However, if you compare Sweetgreen’s direct PS ratio to other top players in the restaurant industry this year, only Dutch Bros (BROS) has a lower direct PS ratio than Sweetgreen:

This PS ratio before is lower than it was in my previous article. Given Sweetgreen’s projected higher double-digit growth rates over the coming years, this valuation seems more reasonable, and it certainly looks more reasonable compared to the other newcomer, CAVA.

risks

As I mentioned in my previous article, food safety is always an obvious risk with a restaurant company, and in Sweetgreen’s case, I think that risk could be heightened given the variety of food the company serves. However, so far there have been no real problems regarding this matter.

Since the company has only upgraded a few stores with their infinite kitchens, I also don’t think it can be assumed everything is go as well as the Penn Plaza upgrade. There may be times when a location (or locations) would need to be closed for weeks at a time, which would definitely hurt the bottom line.

Finally, as the company’s CFO Mitch Reback said on the latest earnings call:

We feel that we don’t control the outside world, and we read pretty much the same things in the same newspapers that everybody reads and reports on, and I think we have a degree of caution about the external environment.”

During the last earnings cycle, some companies like Dollar General were crushed because they believed consumer demand was falling. However, the results of others, such as Walmart, show a strong consumer.

If the macro condition worsens, restaurant stocks that have soared this year, such as CAVA and Sweetgreen, could come back down to Earth.

Conclusion

This was an exceptional quarter for Sweetgreen, as same-store sales growth and improved profit margins at the restaurant level were impressive.

I believe that with the continued rollout of stores with Infinite Kitchens, Sweetgreen will be able to create operational efficiencies that should reduce restaurant costs. Furthermore, if Sweetgreen can regularly serve customers in less than 4 minutes with high-quality offers, customers will definitely come back.

After a tough week for the market, Sweetgreen retreated over 8%. Since September is typically a volatile month for the markets, I think investors can feel comfortable adding to their positions (or starting small like me) and continue to take advantage of future market declines.