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Sweetgreen, Inc.New York Stock Exchange: SG) is underestimated as of today. The current consumer base has easy access to information to easily guide their purchasing decisions. Awareness of chronic diseases and lifestyle-related diseases is also increasing. recent past. Both of these factors have pushed consumers to switch from junk food to a healthier diet.
Businesses that recognize and capitalize on this opportunity will benefit. Sweetgreen is one such company that operates a restaurant chain.
Company Profile
SG is an American fast-casual restaurant chain with a mission to provide healthy food at scale.
Investment merit
Some key trends shaping the food industry
Ever-changing consumer preferences are causing fundamental changes in the food industry. This opens up hugely significant opportunities for brands that can respond to changing consumer tastes. These settings are determined by the following factors:
- Growing interest in health and wellness: Raise awareness and provide information about the health benefits of eating well. Wellness is influencing consumer behavior. Consumers spend money on quality food that comes from good sources, uses well-known ingredients, and is well prepared.
- A major shift in consumer preferences for plant-based foods: A plant-based diet has many benefits for consumers as well as the environment. This encourages consumers to make better purchasing decisions for their health and the environment.
- Going digital: Before COVID, very few companies offered shipping options to their customers. Post Covid, we are seeing rapid adoption of digital platforms and delivery options as customers prefer to order food anywhere, anytime.
- Growing preference for brands with purpose: Consumers are four to six times more likely to buy from companies with a strong purpose, according to the 2020 Zeno Strength of Purpose study. Zeno defines purpose as a unique role and value in society that allows a company to grow and have a positive impact on the world. Consumers feel that by consuming the products and services of these companies, they are also contributing to their cause.
Numerous available markets within the US
There are significant gaps across the United States in how customer needs are being met in new markets (i.e. markets that SG does not serve). By opening stores, SG believes it will be able to expand its consumer base with new customers and also serve existing customers moving to new cities. This is driven by the need to meet the growing demand for healthy and convenient foods.
Their market expansion strategy proved successful in new markets. For example, their new restaurants in Miami and Austin have achieved higher-than-expected initial sales. This is despite the fact that it opened during the COVID-19 pandemic.
Companies often see reduced sales when they introduce similar products to the same market. This is not the case when SG opens a new restaurant in the same geographic market. In the market, which opened at the beginning of fiscal 2014, he more than tripled the number of stores by fiscal 2019, increasing total store-level sales by approximately 85% over the same period.
SG has built restaurants in all but one location with robust secondary lines capable of handling more orders at the same cost of production. This will help us meet the growing demand for out-of-store dining and generate more digital revenue.
By adding dedicated drive-thru and pickup locations, SG needs to diversify and increase density in its market. This will also expand SG’s customer base.
Menus thoughtfully designed to meet the growing interest in healthy food
Complementing signature salads, hot bowls and plates with a seasonal menu that changes five times a year, SG offers:
- Delicious,
- Customizable, and
- A convenient menu for customers.
Offering freshly prepared or ready-to-cook ingredients, SG enables consumers to create their own customized orders to cater to any flavor profile or dietary preference. By dividing the working day into several parts (breakfast, brunch, lunch and dinner), SG increases revenue and average unit volume.
SG’s simple menu and ingredient flexibility are the secrets that make SG part of customers’ daily routines.
Modern Tech Restaurant
SG’s digital platform enables direct customer relationships. Through it, you can offer personalized experiences and give consumers options. As a result, the consumer’s SG experience is enhanced.
A notable increase in SG’s total revenue from 50% (FY19) to 67.4% (FY21) is due to its digital platform. The digital platform offers personalized content and recommendations, including exclusive menus and curated collections, that help SG build an engaged and loyal fan base. Customers who ordered through these digital platforms in Q1 2021 ordered 1.5 times more than customers who used non-digital channels. Customers who ordered through SG’s two or more digital channels in the 2021 fiscal quarter ordered 2.5 times more than customers who ordered non-digitally. This is according to the data reported in SG’s S-1.
prospectus
Scalable supply chain
SG’s competitive and functional end-to-end supply chain begins with over 200 domestic partners and ends with providing consumers with delicious, high-quality meals. Domestic partners, such as local farmers and bakers, are grouped by how close they are to retailers and paired with local distribution networks so food can be tracked and seen from seed to bowl. .
Pre-arrangements are made with farmers to ensure that only the best products are supplied to the market. SG’s supply his chain drives and informs key decisions about seasonal menu and fresh food preparation in the kitchen. This integrated approach ensures:
- high product quality,
- high food safety standards, and
- relationship of trust with customers.
In line with our transparency policy, SG is proud to display the names of our food partners on the walls of all our restaurants.
price target
My model suggests that Sweetgreen, Inc. has a price target of $25.74, or a 70% increase in FY24 from today’s $15.18 share price. This assumes a high rate of revenue growth (20%++) in FY2024 and a future EV/revenue multiple of 2.6x.
your own estimate
We have a similar estimate to the consensus for the next few years.SG will continue to grow at a high rate, supported by new store openings and an improvement in average unit volume. Earnings slightly below guidance in 2Q22), I understand your weak comment. Given the current macroeconomic environment, I think this is only a short-term problem. There is still a lot of room for growth, and there should be no problem even if the company achieves high growth over the medium to long term.
In terms of valuation, SG is currently trading at 2.6x futures earnings, which seems reasonable compared to Shake Shack Inc. (SHAK), so we assumed the multiple remains unchanged.
risk
easily reproducible
Low initial investment in the food and beverage industry, especially salad production, has saturated the market with competitors. If a competitor has enormous financial power, they can offer the same products and services and target other markets, reducing the total available market that SG can expand.
Current food trends may not last
The “health food” wave may be a passing trend. After that, businesses rooted in this trend will also face contraction. The way SG has branded itself, it can prove difficult to switch from salads to other food categories such as pizza and chicken his burgers.
New markets may not like salads
Market tastes and preferences are different. SG’s current market share may have different tastes and preferences than the markets it seeks to enter. This will take longer for the new unit to reach the expected sales and profit levels. Also, new units can be more expensive to build, create, train, and run, with even smaller profit margins.
Conclusion
As of today, I think Sweetgreen, Inc. is underrated. Many factors point to an increase in SG.
- The trend of eating healthy foods shifts customers to healthy food providers.
- To run a successful business, you need to build trust. SG has built trust through transparency from farm to fork. This creates a loyal customer base that acts as a marketing tool to expand your market reach.
- Digital platforms are the new normal. People turn to digital companies for solutions. SG’s digital platform enables purchasing and consumer engagement.
- Certain salad markets also have SGs as authorities and experts. This leads to customer trust and word-of-mouth sales.
These, among other factors, point to moderate growth in SG. Therefore, an investment in Sweetgreen, Inc. is sound and has the potential to produce valuable results.
