Sweetgreen

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Sweetgreen is a fast-casual restaurant chain that sells salads and warm bowls with a focus on transparent sourcing, sustainability, and health.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Sweetgreen’s moat is weak due to fierce competition in the fast-casual space. Moat: 2/5 Sweetgreen’s moat rating is a 2 out of 5, indicating a weak competitive advantage. Here’s a detailed breakdown:

  • Brand: Sweetgreen has built a recognizable brand associated with healthy and fresh food, which does provide some degree of customer loyalty, though it has not translated into material pricing power. While the company strives for brand recognition, especially among health-conscious consumers, it’s not a strong enough moat to prevent consumers from choosing other health-focused alternatives, such as Chipotle or other fast-casual chains.
  • Economies of Scale: Sweetgreen’s scale advantages are not particularly significant. While they have a national footprint, they are not able to reduce costs below that of smaller regional players or lower their prices more than competitors.
  • Customer Switching Costs: There are little to no switching costs for customers, making it easy to switch to another salad or bowl provider. The company tries to build customer loyalty, but that customer loyalty might be eroded away if a comparable substitute pops up close by.
  • Intangible Assets: The Company has some technology and proprietary processes; however, this does not create a significant competitive advantage. Many of these are easily replicated.
  • Network Effects: The business is not a network effect business, because the value of their product or service does not increase with the number of customers.

Risks to the Moat and Business Resilience The “moat,” or competitive advantage, is vulnerable to a number of factors:

  • Intense Competition: The fast-casual market is fiercely competitive, with low barriers to entry and numerous players, including national chains and local startups.
  • Imitation: Sweetgreen’s menu, processes, or store layout are not particularly difficult to replicate. There is little proprietary technology that competitors would not be able to make or copy.
  • Changing Consumer Preferences: Consumer tastes change quickly, and a shift away from salads and bowls could significantly impact Sweetgreen’s sales.
  • Supply Chain Disruptions: As a company that emphasizes fresh and locally-sourced ingredients, disruptions in their supply chain could impact prices and food quality, affecting their business.
  • Economic Downturns: During recessions, consumers may choose to spend less on dining out, leading to a decline in restaurant traffic for discretionary items.

Despite these risks, Sweetgreen shows some resilience in the following ways:

  • Strong Brand Recognition in its Niche: While not a broad moat, the brand resonates with the health-conscious and environmentally conscious customer base and does allow it to retain customers.

  • Emphasis on Omnichannel Capabilities: The company’s focus on online ordering and delivery (though costly) creates convenience for customers and allows them to respond to changing preferences.

  • Focus on High-Quality Ingredients and Food Safety: Sweetgreen’s commitment to local sourcing and high-quality ingredients has built a base of loyal and repeat customers who appreciate these things. This approach is intended to create some loyalty, but this is something that others can replicate as well.

Business Overview

Sweetgreen operates a fast-casual restaurant chain focused on salads and warm bowls. They aim to offer healthy food while being transparent and sustainable in their sourcing practices.

  • Revenue Distribution: Sweetgreen generates revenue primarily through in-store sales and digital channels (delivery, in-app orders, etc.). The chain also offers catering services, which generates some percentage of its revenues.

  • Trends in the Industry: The fast-casual market is currently characterized by a push for healthy options, convenient service, sustainability, and digital ordering and delivery.
  • Competitive Landscape: The fast-casual dining industry is highly fragmented with high competition, from both national players like Chipotle and Panera Bread to smaller local chains.
  • Differentiation: Sweetgreen emphasizes farm-to-table fresh ingredients, innovative bowl options, and a digital customer experience. This differentiates them from competitors who may be more generic. The brand is also very heavily focused on ESG related concerns, which is increasingly important.
  • Margins: Their net profit margin has ranged between -10% and 2%, due to high operating costs and high cost of goods.
  • Acquisitions: Sweetgreen has acquired Spyce, a robotic restaurant, to potentially automate food preparation processes, which may help boost margins.

Financials

The most recent results have been largely poor, with revenue growth coming primarily from price increases and new restaurants, but with significant cost increases. Sweetgreen also continues to struggle with generating enough return on invested capital.

  • Revenue: Sweetgreen’s reported sales have steadily grown, primarily through price increases, new store openings, and online channels. 2022 saw revenues of $486 million, a 17% increase year over year. For the 1st and 2nd quarter of 2023 revenue was up 17.3% and 27.6% year over year respectively. This growth has been good but is not translating into large increases in profitability.
  • Gross Profit: Gross profit has remained steady at around $300 million as sales grew from 2021 to 2022 (62.1%). However, gross margin has declined to around 60%, and is projected to fall further with more inflation.
  • Profitability: Sweetgreen has struggled to generate profits, with a net income of $(188) million in fiscal 2022. In Q1 and Q2 of 2023 net losses have been reported as $34.7 million and $14.7 million. The company hopes to break even by the end of 2024, but that is still very speculative.
  • Operating Expenses: Operating expenses have risen significantly during 2021 and 2022 due to a variety of factors: an increase in labor expenses due to labor shortages; costs related to new restaurant openings; an increase in G&A expenses; among other factors. This has put a strain on the profitability of the business.
  • Debt: As of June 25, 2023, Sweetgreen has a total debt of $161 million, consisting primarily of lease liabilities, while they have $188 million in cash on hand.
  • Equity: Shareholders’ equity has been decreasing as the company continues to lose money, meaning equity is a drag on enterprise value. The company has also had to take on additional convertible debt to fund operations.

Recent Concerns/Controversies

  • Inflation: Sweetgreen has stated in earnings calls that increased inflation and the resulting increase in costs is a drag on the company’s bottom line. This is expected to continue for the near term.
  • Wage Increases: Sweetgreen, along with the restaurant industry as a whole, is facing rising costs due to wage increases. As the tight labor market will likely continue, this is likely to be a persistent headwind.
  • Continued Losses: Sweetgreen has been unable to generate profits for many years. Continued losses are always a concern for investors.
  • Inability to predict the next winning dish: Management admits that, despite having many talented chefs, they often fail to predict which new food combinations will be popular with their customers.

Understandability: 2/5 Sweetgreen’s business model, while seemingly simple, has several complex aspects, making it moderately hard to understand. Specifically:

  • While its concept seems intuitive, translating the value proposition into profitability has proven challenging.
  • They have multiple revenue streams (in-store, digital, and catering), and the interactions between these can be complex.
  • Their commitment to sourcing local ingredients and sustainability adds complexity to their business model, and it’s not always clear if those costs will lead to greater profitability and more brand loyalty.
  • The fast-casual space is dynamic, and changing consumer preferences can affect Sweetgreen greatly. This means that it may be difficult to forecast results.
  • Their value proposition is not just in its products, but also in an overall experience.
  • There are complex metrics to understand such as same store sales change, revenue, margins, and ROIC.

Balance Sheet Health: 3/5 Sweetgreen’s balance sheet health is a moderate 3 out of 5, and here’s why:

  • Debt: The company has about $161 million in debt, which does not appear overly large, although this is more than the amount of cash they have on hand. Also, the lease liabilities are significant and likely to continue to be.
  • Cash: The company has around $188 million in cash and cash equivalents, which means they have enough liquidity.
  • Equity: Sweetgreen’s equity has been declining, and there have been instances of it turning negative, this is due to the company’s continued unprofitability.
  • Financial Flexibility: They have ample access to revolving credit and other credit facilities, and thus can take advantage of opportunities. They have enough flexibility in the short term, however there is no guarantee that they will be profitable or have a positive return in the long run.
  • Overall: While the company is not on the brink of bankruptcy, they do have some key things to work on. Cash levels are enough to meet most near-term obligations. However, profitability needs to be focused on more than growth if the company is to survive long term.