Many promising upstarts with hopes of becoming the next Chipotle have failed in the competitive restaurant sector during the previous decade.
The fast-casual salad brand Sweetgreen (NYSE: SG) is one of the latest restaurant stocks to go public, and it has started slowly like many others. The stock is 59% below its post-IPO peak, despite a recent rebound. As this innovative restaurant business dominates its niche, there are four reasons to buy it now.
1. Strong restaurant numbers for Sweetgreen Last year, Sweetgreen lost $113 million under GAAP. As it cuts overhead expenditures like general and administrative expenses, which made up 25% of revenue in 2023, the company should become profitable.
But Sweetgreen's eateries are doing well. Fast-casual restaurants had a $2.9 million average unit volume, which is among the best. Chipotle's average unit volume is $3 million, only marginally better. Sweetgreen's restaurant-level operating margin rose to 17% in 2023 from 15%, and the business expects it to rise to 18.0% to 19.5% in 2024. Chipotle's restaurant-level profit margin was 26.2% last year, so it could rise over time.
2. Plenty of room for growth Sweetgreen has 220 outlets, but management expects to open 1,000 by the end of the decade, making its footprint five times larger. Its high average unit volumes indicate strong demand for the concept, and its low fast-casual salad competition should help it grow.
The company should become profitable as overhead costs decrease as it grows. In contrast, Chipotle spent 6.4% of revenue on general and administration expenses and 10.4% on overhead in 2023. As it grows, Sweetgreen has room to enhance margins.
3. Infinite kitchen could disrupt. Due to its investment in the Infinite Kitchen, a salad-making robot-staffed kitchen, Sweetgreen has been spending so much on overhead. The Infinite Kitchen might cut expenses and boost throughput. Like Chipotle, Sweetgreen assembles orders on a line, so speed is crucial.
The Infinite Kitchen is only used at two Sweetgreen locations, and its Naperville, Illinois, location generated a 26% restaurant-level profit margin last June. Even in the location's first month, that number was better than the rest of the business. The robotic salad-assembly system can handle 400–500 orders per hour, or 7–8 per minute. At 50% faster than the average Sweetgreen, the technique might offer the company an edge.
Sweetgreen wants all its locations to have the Infinite Kitchen by five years, which might boost profits.
4. Reasonable valuation Sweetgreen stock has doubled year to date thanks to a solid earnings report, but its price-to-sales ratio of 4.2 appears reasonable given its growth potential. If Sweetgreen can reach its long-term objective of 1,000 stores this decade and implement its automated system nationwide, its stock might rise dramatically.
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