When it comes to investing in restaurant stocks, Chipotle Mexican Grill (CMG +2.18%) is the gold standard. A $10,000 investment when the company went public in 2006 is worth over $600,000 today. Its operating profit is up about 4,000% since going public, which is a big reason for its sensational returns.
These sensational returns have investors constantly looking for the "next Chipotle," and salad-centric chain Sweetgreen (SG +2.65%) is commonly seen as a contender. To be sure, the restaurant chain shares many attractive qualities with Chipotle. But Sweetgreen lacks something that Chipotle had at this stage, and knowing this difference is necessary for investors trying to understand this investment opportunity today.
A notable difference between Sweetgreen and Chipotle
Sweetgreen is a small restaurant chain of about 230 locations. But these locations pack a punch, with average unit volume of about $2.9 million. Therefore, the company already has trailing 12-month revenue of about $650 million, making it a bigger business than what some might expect.
NYSE: SG
Key Data Points
However, if there's a knock against Sweetgreen, it's that it's unprofitable. The company had an operating loss of $16 million in the second quarter of 2024 alone. When comparing it to Chipotle, I think this is noteworthy.
Chipotle has been profitable since 2004. It was comparable in size to Sweetgreen back then. During that year, Chipotle generated revenue of $471 million, securing a full-year operating profit of $6 million.
In 2005, Chipotle's business really started gathering steam. It generated full-year revenue of $628 million (which was still smaller than Sweetgreen is now), allowing its operating profit to quintuple to $31 million.
Sifting through their respective statements of operations reveals the difference: As a percentage of revenue, Sweetgreen's general and administrative expenses are more than double what Chipotle's were in 2004. This is the notable difference between the two chains.
What does this mean for Sweetgreen investors?
If you look at its potential, Sweetgreen has a lot to like. For example, the company recently raised prices, but its customers were undeterred. Q2 same-store sales jumped 9% year over year, which included a 4% increase for restaurant traffic. That's good news.
Moreover, Sweetgreen might not be profitable as a whole. But after taking out corporate expenses, the company is profitable at a restaurant level. In fact, its Q2 restaurant-level profit margin was 22%. Few restaurant companies are as good as this.
Surprisingly, it could be on the verge of getting even better. Sweetgreen is experimenting with robotic automation technology at its restaurants -- a project it calls Infinite Kitchen. Its first restaurant location outfitted with Infinite Kitchen has a restaurant-level margin of 31% as of Q2, which is far better than locations without it. Management understandably aims to roll this out into more locations this year and beyond to boost its profits.
Here's another encouraging note: While general and administrative expenses are robbing Sweetgreen of profitability today, they are already trending in the right direction before Infinite Kitchen rollouts. The table below shows how things have been trending.
| Year | 2020 | 2021 | 2022 | 2023 | 1H 2024 |
|---|---|---|---|---|---|
| General and administrative expenses as a percentage of revenue | 45% | 37% | 40% | 25% | 22% |
Numbers from Sweetgreen's financial filings. Table by author.
Sweetgreen's management has done a good job of keeping general and administrative expenses in check as it's expanded. If the trend continues, that's a good thing for investors.
Sweetgreen isn't profitable today because general and administrative expenses have been too high. But looking at the trends, the company could turn the corner on profitability as sales volume increases, automation efforts boost margins, and general and administrative expenses keep coming down.
However, there's one final comparison between Sweetgreen and Chipotle that I should point out before closing. Chipotle is a concept that has scaled incredibly well. It has over 3,500 locations today and is targeting more than 7,000 long term. In comparison, Sweetgreen's management believes that 1,000 locations by 2030 may be pushing its limits.
There may not be as much consumer demand for a high-volume salad chain compared to consumer demand for burritos. Therefore, while Sweetgreen could turn the corner on profitability, it's fair to wonder how big the overall profits will be given the limits to how big this chain can be someday.
In other words, Sweetgreen stock could be a good opportunity. But it may not be as big an opportunity as Chipotle stock was when it went public.
