SWEETGREEN FILES FOR IPO – IS IT WORTH $1.8 BILLION?

Sweetgreen has filed its widely anticipated preliminary IPO prospectus and will trade within the next several months as (“SG”).  While the filing does not disclose exactly how much will be raised, the “place holder” is for $100M, to be adjusted depending on investor response to “the story”. The story has been good enough to privately raise something like $600M over the last four years, most recently at a valuation approaching $2 billion, so we are inclined to think the deal will be in demand. The following writeup provides the most salient features of Sweetgreen’s operating record and their expansion plans. In preview, while it’s possible that SG will be viewed as the second coming of Dutch Bros (BROS), the most successful IPO of ’21, the store level and corporate profitability of SG substantially lags that of BROS.

Sweetgreen started in 2007 with a 560 sq ft restaurant in Wash DC, now has 140 company operated locations in 13 states. This rapidly growing fast casual concept serves fresh, plant-forward, earth-friendly meals, sourced with sustainable supplies. Especially since there have been so many economic distortions over the last eighteen months, the prospectus provides some “definitions”, as follows:

Average Unit Volume (AUV) of $2.5M is in the trailing twelve months (TTM) ending 9/26/21. Revenues of $303M is also in TTM ending 9/26/21. The 68% of sales from Digital Revenues are in the 29 weeks ending 9/26/21. The 1.35 active customers placed at least one order in 90 days immediately prior to 9/26. Historical Cash on Cash returns at the store level is for months 13-24 after opening. The Same Store Sales quoted is for stores open for a full twelve month period prior to the measurement period, excluding closures.  Due to Covid-19 related closures, 19 restaurants were closed in Q2 and Q3 of ’20, all of ’20, Q1 and Q2 of ’21, none excluded in 2019 or Q3 of ’21. Adjusted EBITDA and Adjusted EBITDA Margin excludes interest income and expense, provision for taxes, D&A, stock based compensation, loss or gain on disposal of P&E, impairment of long lived assets, and Spyce acquisition costs. Restaurant Level Profit and Margin, excludes G&A, D&A, pre-opening costs, impairments, and loss from disposal of P&E. AUVs also excludes temporary closures in Q2’20 and Q3’20, ‘2, Q1 and Q2 of ’21, none in Q3’21.

THE STORY

The following bullet points, as quoted from the prospectus describe Sweetgreen’s appeal and important quantitative results.

Transparent and Scalable Supply Chain

“We have built a differentiated, end-to-end supply chain that begins with more than 200 domestic food partners, such as farmers and bakers, and culminates in delicious, high-quality food for our customers.”

Healthy and Habitual Menu

“We have designed our menu to be delicious, customizable and convenient to empower our customers to make healthier choices for both lunch and dinner.”

Digitally-Driven Restaurants

“We strongly believe in harnessing the power of technology to enhance the sweetgreen experience.”

Passionate Team Member Culture

“Our greatest competitive advantage is, and has always been, our people. Our teams are energized every day by our purpose-driven brand and strong growth trajectory. We empower our more than 5,000 team members to develop lifelong skills and advance their careers”

A Brand Rooted in Purpose and Community

“Our brand is designed to inspire consumers to live healthier lives without compromising their values. This allows sweetgreen to lead conversations on the importance of what we eat and the impact it has on the environment.”

Management summarized historical results and sets the stage for the future:

“We believe we have also demonstrated strong unit economics in conjunction with sustained rapid growth. We reported a Restaurant-Level Profit Margin of 16% for fiscal year 2019, in addition to a $3.0 million AUV as of the end of fiscal year 2019. Our Restaurant-Level Profit Margin declined to (4%) for fiscal year 2020, reflecting the impact of the COVID-19 pandemic and civil disturbances, but rebounded to 12% for our fiscal year to date through September 26, 2021, and 14% in our third fiscal quarter of 2021, as we started to see the beginning of the recovery from the COVID-19 pandemic, although our urban stores in central business districts, in particular, continued to be significantly impacted by the pandemic and the spread of the Delta variant. Additionally, we had average year two Cash-on-Cash Returns for our restaurants opened from 2014 through 2017 of 40%. Year two Cash-on-Cash Returns for restaurants opened in 2018 were 25%, which is a result of the significant impact of the COVID-19 pandemic on performance in 2020, and as a result, we believe are not representative of our historical or targeted future performance.

“As we continue to expand, we are confident that our compelling restaurant-level economics will continue to work across geographies and market types. We plan to target:

Year Two Cash on Cash Return of 42% to 50%

AUV of $2.8 million to $3.0 million

Restaurant Level Profit Margin of 18%-20%

An average investment of approximately $1.2M per new restaurant.

“We plan to open at least 30 domestic, company-owned restaurants in 2021 and to approximately double our current footprint of restaurants over the next three to five years. We feel confident in our market expansion strategy because of our recent success in new markets. For example, some of our new restaurants in Miami and Austin, which opened during the COVID-9 pandemic, have achieved strong initial sales volumes, which were significantly in excess of our expectations. As we have opened new restaurarants in the same geographical market, we havenot historicall experienced cannibalization of our existing restaurants. In the markets in which we operated at the beginning of fiscal year 2014, we more than tripled our restaurant count from fiscal year 2014 to fiscal year 2019, and in parallel our AUV grew in those markets by approximately 85% over the same period. Although we continued to open new restaurants in those markets in fiscal year 2020, AUV in those markets decreased from fiscal year 2019 by 36% as a result of the impact of the COVID-19 pandemic.

Unique Digital Capability

“We also believe we have significantly enhanced the productivity of our restaurants by supporting multiple channels so that we can meet our customers where they are. Sales through our Owned  DigitalChannels contributed 43% and 56% of our fiscal year 2019 and fiscal year 2020 revenue, respectively. When including orders placed on our Marketplace Channel, this digital share increases to 50% and 75% of our fiscal year 2019 and fiscal year 2020 revenue, respectively. For our fiscal year to date through September 26, 2021, our digital share has remained strong, with a Total Digital Revenue Percentage of 68% and an Owned Digital Revenue Percentage of 47%, even as revenue from our In-Store Channel improved.”

“Planning for future growth, we have intentionally built additional capacity in our existing restaurants for more digital revenue. All but one of our locations have been built with robust secondary lines that can flex up to handle more order volume without adding more costs or square footage. This allows us to quickly take advantage of the rising demand for off-premises dining.”

New Restaurant Formats and Spyce Acquisition: “ We plan to diversify our store formats by adding drive-thru and pick-up only locations to densify our markets, and to bring sweetgreen into wider variety of neighborhoods. In September 2021, we completed the acquisition of Spyce Food Co. (“Spyce”), a Boston-based restaurant company powered by automation technology. The purpose of the acquisition is to serve our food with even better quality, consistency, and efficiency in our restaurants via automation. This investment has the potential to allow us to elevate our team member experience, provide a more consistent customer experience, and, over time, improve our capacity and throughput, which we believe will have a positive impact on Restaurant-Level Profit Margin.” 

HISTORICAL GROWTH

“We plan to open at least 30 domestic, company-owned restaurants in 2021 and to approximately double our current footprint of restaurants over the next three to five years. We feel confident in our market expansion strategy because of our recent success in new markets. For example, some of our new restaurants in Miami and Austin, which opened during the COVID-9 pandemic, have achieved strong initial sales volumes, which were significantly in excess of our expectations.

Market Densification: As we have opened new restaurants in the same geographic market, we have not historically experienced cannibalization of our existing restaurants. In the markets in which we operated at the beginning of fiscal year 2014, we more than tripled our restaurant count from fiscal year 2014 to fiscal year 2019, and in parallel our AUV grew in those markets by approximately 85% over the same period. Although we continued to open new restaurants in those markets in fiscal year 2020, AUV in those markets decreased from fiscal year 2019 by 36% as a result of the impact of the COVID-19 pandemic.”

INVESTMENT FOR GROWTH

As briefly described by the Company in the paragraph just above, and below, expenses incurred, with $600M of capital provided by early stage private investors, has been an investment geared toward long term  success. Per the prospectus:

“To date, we have not achieved profitability in any fiscal period, in large part because we have consciously invested in our operating and technology foundation. We believe this foundation has positioned us to achieve the above growth strategies, while also implementing restaurant-level efficiencies (such as enhanced labor management, automation and optimal store layouts) and economies of scale in our supply chain. We expect strategic investments in these key areas to result in strong AUV growth and an expansion of our Restaurant-Level Profit Margin.

“As we accelerate our growth in the coming years, we expect to be able to do so efficiently, without significantly increasing our general and administrative costs. We are confident that this will enable topline growth and operational leverage, resulting in improved Adjusted EBITDA Margins.”

THE NUMBERS

The following table provides a quarterly summary of bottom line results.

The following tables provide a summary of store level expenses, as well as corporate G&A. In preview: While CGS and even Labor are within reasonable bounds for successful restaurant chains, especially considering COVID-19 disruptions, Occupancy, Other Restaurant Expense,  D&A, and (perhaps most noteworthy) corporate G&A, are eye catching.

CONCLUSION

We have no doubt that Sweetgreen management is highly qualified, has created an admirable corporate culture, provides excellent value to a receptive audience, and is personally impressive, as demonstrated by their capital raising skills. At the same time, for whatever combination of reasons, store level returns have not approached those of Shake Shack (in their prime), Chipotle (once again) or the most recent stock market darling, Dutch Bros.  In case you didn’t dwell on the summary of operating results, shown above, the Company has been reporting quarterly net losses of $30-40M. Even pre-Covid, the quarterly losses ranged from $11.7M in Q1’19 to $26.6M in Q4’19. Our commentary regarding line by line expectations: the G&A percentage of sales will no doubt come down as the Company grows, but store level Occupancy, Other Operating, and Pre-Opening cash expenses are very high, even allowing for COVID distortions. D&A at 10% of sales, while not a cash expense, speaks to the fixed investment per unit net of tenant allowances. In terms of the valuation for SG, the stock: If SG’s IPO valuation were $2 billion, it would require $40M after taxes to support a pretty aggressive 50x P/E multiple. We don’t know when (or if) that will happen, but safe to say it will not be in the next several years.  We would rather not wait that long for the fundamentals to catch up to the valuation.

Roger Lipton