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Why Is Sweetgreen Losing Money?

By Jon Quast, Jason Hall, and Danny Vena – Dec 17, 2021 at 3:30AM

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Corporate expenses are overshadowing restaurant-level profits.

Salad restaurant chain Sweetgreen (SG 0.14%) only just went public in November, meaning this is a company that investors are still becoming familiar with. With Sweetgreen, management points out that its restaurants are profitable. However, as a whole, the company is losing money. Why?

In this video from Motley Fool Backstage Pass, recorded on Dec. 6, Fool contributor Jon Quast talks with fellow contributors Danny Vena and Jason Hall about why Sweetgreen is losing money. The trio agree that if the company can keep corporate expenses in check while growing its business, those restaurant profits could start showing up at the corporate level as this restaurant stock gains scale.

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Jon Quast: One final thing that I did want to point out as for closing here, I've been talking about what they talked about profitable on a restaurant level, but that is not on a corporate level. A corporate level, you have to add in things like general and administrative costs, your corporate structure. If you look at their cash flow from operations, they have an $80 million operating loss for the first nine months of 2021. General and administrative costs are coming in at 32% of revenue. That is quite high. It doesn't look like they're substantially improving right now either. If you look at 2019 before the pandemic affected sales and all that, we had general and administrative costs at 32.3% of total revenue. It's holding steady right now, you're going to want to see that come down, you're going to want to see those corporate costs decrease as a percentage of revenue if this company is going to be able to turn into something that is creating shareholder value at the corporate level.

Very well-capitalized...

Danny Vena: I Just wanted to ask, what are the things through seeing, particularly with these companies that have just gone public or getting ready to go public is that there's a high amount of costs involved in the actual IPO that hit their financials. Is that part of what that dent is there or is that they're just spending that money?

Quast: To my understanding, that has nothing to do with the IPO process. It has everything to do with, you have this huge corporate structure and you only have 140 locations. You don't have that economy of scale yet at the company's structure level. Now if you look at the individual restaurant, yes, this is a profitable concept, churning out 10%, 15% profit margins at the restaurant, but then when you have to pay all the corporate headquarters and all that, that's where it becomes unprofitable.

But well-capitalized, $137 million in cash prior to the IPO. The IPO's added $330 million to that. Plenty of cash for this company, I think it's a little bit below a  $3 billion dollar valuation now, but almost $500 million in cash. Well-capitalized for ambitious expansion over the next five years, looking to double that footprint.

Jason Hall: I want to point out too when a company goes, public like this, and it scales up its corporate costs to meet all of its obligations as a public company and to drive growth. It's not uncommon that you see that, where the SG&A and corporate overhead is pretty large and then add scale, that number doesn't change a whole lot and the unit economics pay off at the restaurant level. It's important to look at those two things separately. I think that's really important, Jon.

Quast: I think the big question, if you're buying Sweetgreen stock today, the question that you would need to answer is, is this a company that can expand outside of a select number of urban areas? This could be something that really resonates around the country in suburban areas.

Hall: And do those unit economics holdup? That's the key.

Quast: There you go.

Danny Vena has no position in any of the stocks mentioned. Jason Hall has no position in any of the stocks mentioned. Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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