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One More Unicorn

Trendy salad chain 🥗 Sweetgreen ($SG), which filed confidentially for IPO back in June, is finally going public next week. The eatery that has turned lettuce into gold was founded in 2007 and is now worth $1.8 billion. It currently has 140 restaurants across 13 states and Washington, DC.

For Sweetgreen, salad is a tech business; 68% of its revenue this year has come from online orders made on the Sweetgreen app or third-party services such as DoorDash ($DASH), Grubhub ($GRUB), and Uber Eats ($UBER). For comparison, at other restaurant chains such as Chipotle ($CMG) and Shake Shack ($SHAK), less than half of their sales came via digital channels. 

Like most restaurants, Sweetgreen suffered in 2020; its sales were down 19.5%. But the company has now recovered as its revenue jumped 51% to $243 million in the first nine months of the year.

Sweetgreen is still deeply unprofitable; its operating margin is -35.6% this year because it’s focused on growing its restaurant count fast. So far in 2021, it has opened 21 new restaurants all in densely populated cities such as NYC and LA, which means that its opening and operating costs are quite high. The company also plans to double its current footprint of restaurants over the next three to five years — with this pace of growth, it’ll be difficult for SG to dramatically improve its bottom line soon.


đź“«Originally posted as part of the Sunday Newsletter
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Commentary

Sweetgreen has built a strong brand that consumers love. Its Net Promoter Score of 78 👏 is one of the highest across all industries which clearly shows high customer satisfaction.

The company benefits from the increasing demand for healthier food alternatives. In 2020 alone sales of organic products jumped 14.2% while conventional product sales rose 10.7%. In other words, the premium salad chain has strong growth prospects. Yet its deep losses and limited progress towards profitability make SG a high-risk/high-reward play.

Sweetgreen has priced its IPO at the midpoint price of $24 apiece which translates into a market value of $2.5 billion and a P/S ratio of 8.4. Restaurant chains have a wide range of valuation multiples, making it difficult even to compare peers. For example Chipotle, another high-growth chain is priced at 7.2x sales while fast-growing chicken wing chain Wingstop ($WING) is priced at 18.7x sales.

It wouldn’t make sense for SG to be priced at such high multiples due to its asset-heavy business model. Unlike WING that generates high margin licensing revenue from franchisees, SG operates all the restaurants itself. So given its high growth rates its current valuation is reasonable. Shares start trading on Thursday.

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