The restaurant industry is notoriously competitive, and plenty of promising upstarts with aspirations of becoming the next Chipotle have fallen by the wayside over the last decade.
One of the more recent contenders to go public is Sweetgreen (SG 7.73%), the fast-casual salad chain, and like many of the restaurant stocks that have come before it, it has gotten off to a slow start. The stock is down 59% from its post-IPO peak, even after a recent rally.
However, there are four reasons why now looks like a great buying opportunity for this disruptive restaurant chain as the company takes over its niche in the industry.
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1. Sweetgreen's restaurant-level numbers are strong
Sweetgreen is still unprofitable on a generally accepted accounting principles (GAAP) basis: Last year, it reported a loss of $113 million. However, the company should progress toward profitability as it reins in overhead costs like general and administrative expenses, which accounted for 25% of revenue in 2023.
However, Sweetgreen's restaurants are performing well. Average unit volume, or average sales per restaurant annually, was $2.9 million, a figure that's among the best in the fast-casual industry. By comparison, Chipotle's average unit volume is only slightly better at $3 million.
Sweetgreen's restaurant-level operating margin was 17% in 2023, up from 15% the year before, and the company sees that figure improving again to 18.0% to 19.5% in 2024.
There's potential for long-term improvement of that metric as well -- Chipotle's restaurant-level profit margin reached 26.2% last year.
2. There's plenty of room for growth
Sweetgreen only has about 220 locations currently, but management sees room in the market for at least 1,000 restaurants by the end of the decade, meaning its footprint should grow by at least five times over the coming years.
Its strong average unit volumes show that demand for the concept is strong, and it faces relatively little direct competition in the fast-casual salad category, which should help its expansion.
As the company grows, the percentage of its revenues taken up by overhead costs should come down, helping it shift to profitability. Chipotle, by comparison, spent just 6.4% of its revenue on general and administrative expenses and 10.4% of its revenue on overall overhead expenses in 2023.
That shows that Sweetgreen has a lot of room for margin improvements as it scales the business.
3. Infinite kitchen could be a real disrupter
Part of the reason why Sweetgreen has been spending so much on overhead is because it's investing in new technology it calls the Infinite Kitchen -- essentially, a kitchen staffed with a salad-making robot.
The Infinite Kitchen has the potential to bring costs down significantly and improve throughput. Like Chipotle, Sweetgreen puts together its orders in an assembly line format, so speed is essential.
Only two Sweetgreen locations are using the Infinite Kitchen so far, and its Naperville, Illinois, location had a 26% restaurant-level profit margin last June. Despite being the location's first month in operation, that number was still significantly better than the rest of the business. The robotic salad-assembly system is able to process 400 to 500 orders an hour, or about seven to eight per minute. That's 50% faster than the typical Sweetgreen, meaning the system could give the company a significant advantage.
Sweetgreen aims to have all of its stores equipped with the Infinite Kitchen within five years, which could drive its profitability significantly higher.
4. The valuation is reasonable
Sweetgreen stock has roughly doubled year to date with the help of a strong earnings report, but trading with a price-to-sales ratio of 4.2, its valuation still seems reasonable relative to its growth opportunity.
If the company can execute on its long-term goal of growing to 1,000 stores this decade and rolling out its automated system to all locations, Sweetgreen stock could move significantly higher in the coming years.
